The confusion surrounding the banker super-tax and to whom it will actually apply still rolls on nearly a week after the Chancellor's pre-Budget report announcement of a 50% levy on all banker bonuses of more than £25,000, up until 5 April 2010.
Although at first it looked like fund managers, brokers and advisory boutiques had had a lucky escape, this now looks far from certain. Amid growing confusion over who exactly will and will not be affected (and a bit of controversy over the exclusion of N M Rothschild) the government is now expected to extend the scope to ensure that Rothschild (and others) do not slip through the net by way of their non-standard year-ends and other quirks.
Despite a lack of clarity, City heavyweights have wasted no time in launching a riposte - eight of Britain's top stockbroking firms have joined forces to fight the government and its tax. London-based interdealer broker Tullett Prebon yesterday went one step further when it offered staff the chance to move to one of its overseas offices in regions with 'more certain tax regimes.'
Although judged by some industry observers to have been a hasty move by Tullett, one can hardly blame them and others when the picture remains so unclear. Claims of a mass exodus to Switzerland are thought by many to be exaggerated, particularly with signals from our European neighbours that they will be potentially following suit. However this, combined with the 50p tax rate, does little to reassure overseas banks that the UK is a place to stay and do business.
However what is most likely to happen, and will be ugly, is a surge in guaranteed bonuses. Exempt from tax, higher base pay is likely to be taken up even more widely (adding to the already growing trend.)
In reality, it is this type of City remuneration, not bonuses, which is the most undesirable – not only because of the proven encouragement of highly risky and reckless behaviour but the hefty bonus contracts into which banks are then locked and may later on be able to ill afford . If profits start to fall, banks will have little flexibility to cut remuneration and it could well be in the end that it is the shareholders that lose out as institutions slash dividends in order to dish out the guaranteed bonuses to retain top staff.
SS
Tuesday, December 15, 2009
Thursday, November 26, 2009
A question of trust
Pension scheme trustees have been the whipping boys (and girls) of the pensions industry for many years. Four years ago, FRC Chairman Sir Brian Nicholson was amongst those bemoaning their inadequacies, while more recently, Ros Altman was arguing in the Telegraph that "the complexity of investment means you have to question whether they are equipped for the task."
The Pensions Regulator's new report raises similar concerns about whether trustees are fit for purpose. The report notes trustees must ensure they have the right skills and hire the right people to ensure their pension scheme is run smoothly, and reveals that fewer than half the 800 or so trustees surveyed by the regulator "felt 'very confident' about the internal controls put in place to avoid inappropriate investment strategies".
There are striking parallels here with a survey carried out back in 1998 by the then Department for Social Security (now DWP), which found that "most trustees came to the position with little or no direct relevant experience".
The picture which emerges is of a committed and well intentioned, if not particularly expert, group of people, faced with an increasingly complex task. A bit like a parish council or a board of school governors.
To the average pension scheme member, though, the "committed" and "well-intentioned" qualities probably provide enough reassurance to outweigh the lack of expertise. The alternative to the trustee model, after all, would be a contract-based pension, in which a third party – usually an insurance company – provides the employee with a pension arrangement as just another financial product (like an ISA or an insurance policy). And we all know what high esteem such service providers are held in.
AF
The Pensions Regulator's new report raises similar concerns about whether trustees are fit for purpose. The report notes trustees must ensure they have the right skills and hire the right people to ensure their pension scheme is run smoothly, and reveals that fewer than half the 800 or so trustees surveyed by the regulator "felt 'very confident' about the internal controls put in place to avoid inappropriate investment strategies".
There are striking parallels here with a survey carried out back in 1998 by the then Department for Social Security (now DWP), which found that "most trustees came to the position with little or no direct relevant experience".
The picture which emerges is of a committed and well intentioned, if not particularly expert, group of people, faced with an increasingly complex task. A bit like a parish council or a board of school governors.
To the average pension scheme member, though, the "committed" and "well-intentioned" qualities probably provide enough reassurance to outweigh the lack of expertise. The alternative to the trustee model, after all, would be a contract-based pension, in which a third party – usually an insurance company – provides the employee with a pension arrangement as just another financial product (like an ISA or an insurance policy). And we all know what high esteem such service providers are held in.
AF
Tuesday, November 17, 2009
Is TUPE Loopy?
TUPE the "Transfer of Undertakings (Protection of Employment)" in my view should probably stand for "Totally Unwanted Piece of Employment" law. I knew it existed but I suspect like so many of you, it never occurred to me that it would ever affect us. And then bam! - it comes along and gives you an almighty smack around the face when you are least expecting it (or wanting it for that matter).
The rub is that legislation was revised in 2006 when it was extended to include "service provision changes". That suddenly meant that if you worked in a service industry such as marketing, advertising or PR, you could be liable to take on staff from incumbent agencies and on the same terms as they were originally employed when clients, inevitably, move from one provider to the other. This is absolutely crazy. Often the reason clients change service providers is because they are either unhappy with the service they are getting or want a fresh team with fresh ideas or even a combination of both. And probably more importantly given current market conditions, agencies could land up with staff that they simply don't want or can't afford.
On the other side of the coin this can be used as a convenient way of off-loading the 'dead wood' - saving the expense of politely showing people the door. Of course, the savvy Directors among you will be quick to ensure that your 'rising stars' would not inadvertently fall within the rules of the legislation. But it does create a whole new downside risk when pitching for new business, especially when the incumbent is small and losing clients. Does it effectively create a potential liability for clients who take on a small PR agency and find that moving agencies suddenly has an unknown price attached to the pitch process?
Don't get me wrong, I am all for making sure that employees aren't exploited for the benefit of businesses, but I think this is one step too far. What happened to good old loyalty and duty of care? And the employee who is transferred between employers can hardly relish the prospect of arriving at their new company knowing they weren't chosen but were foisted upon them?
The new TUPE rules were criticised in The Lawyer a couple of years ago, which is ironic because in my view the only winners here are the lawyers (let's face it, the fees earned just explaining the legislation are likely to net them at least £1,000). And the losers? Well, pretty much everyone else really.
PD
The rub is that legislation was revised in 2006 when it was extended to include "service provision changes". That suddenly meant that if you worked in a service industry such as marketing, advertising or PR, you could be liable to take on staff from incumbent agencies and on the same terms as they were originally employed when clients, inevitably, move from one provider to the other. This is absolutely crazy. Often the reason clients change service providers is because they are either unhappy with the service they are getting or want a fresh team with fresh ideas or even a combination of both. And probably more importantly given current market conditions, agencies could land up with staff that they simply don't want or can't afford.
On the other side of the coin this can be used as a convenient way of off-loading the 'dead wood' - saving the expense of politely showing people the door. Of course, the savvy Directors among you will be quick to ensure that your 'rising stars' would not inadvertently fall within the rules of the legislation. But it does create a whole new downside risk when pitching for new business, especially when the incumbent is small and losing clients. Does it effectively create a potential liability for clients who take on a small PR agency and find that moving agencies suddenly has an unknown price attached to the pitch process?
Don't get me wrong, I am all for making sure that employees aren't exploited for the benefit of businesses, but I think this is one step too far. What happened to good old loyalty and duty of care? And the employee who is transferred between employers can hardly relish the prospect of arriving at their new company knowing they weren't chosen but were foisted upon them?
The new TUPE rules were criticised in The Lawyer a couple of years ago, which is ironic because in my view the only winners here are the lawyers (let's face it, the fees earned just explaining the legislation are likely to net them at least £1,000). And the losers? Well, pretty much everyone else really.
PD
Friday, November 6, 2009
Keeping the lifeboat afloat
Not the quietest of weeks for the Pension Protection Fund.
The Fund was set up four years ago in response to growing clamour from pensioner lobby groups to provide compensation for people whose DB pensions fail to pay out when the sponsoring employer goes belly up. The initial funding comes from a levy charged by the PPF on all DB schemes, the level of which is determined by each scheme's exposure to risk – the greater the exposure, the higher the levy.
Earlier this week, it was reported that Transport for London is seeking a legal review of the levy imposed by the PPF. TfL claims the levy is "unreasonable", and other DB providers with similar concerns about the unfairness of the levy will no doubt be awaiting the outcome with interest.
And today it emerges that the Fund's deficit more than doubled in the year to March 2009, from £517 million to £1.23 billion, prompting – according to the Telegraph – "questions about the viability of Britain's pensions lifeboat".
Before anyone presses the panic button, however, it's worth bearing a couple of things in mind. Firstly, as PPF Chief Executive Alan Rubenstein recently pointed out, the PPF is currently paying out around £7m a month to its 13,000 beneficiaries, and while these numbers will increase in the coming months, the Fund already has some £3bn in assets, so "let's not pretend there are not extreme scenarios out there that could see us run out of money, but that will not be happening in the foreseeable future".
And secondly, Mr Rubenstein and his colleagues are smart enough to have learned from the American experience. The US equivalent of the PPF, the Pension Benefits Guaranty Corporation was set up in the mid seventies, and has amassed an eye-watering $33 billion deficit. Even so, the debate in Washington is around how to fix the PBGC, not how to get rid of it. What politician, after all, would want to be seen as the individual who allowed a lifeboat to sink?
AF
The Fund was set up four years ago in response to growing clamour from pensioner lobby groups to provide compensation for people whose DB pensions fail to pay out when the sponsoring employer goes belly up. The initial funding comes from a levy charged by the PPF on all DB schemes, the level of which is determined by each scheme's exposure to risk – the greater the exposure, the higher the levy.
Earlier this week, it was reported that Transport for London is seeking a legal review of the levy imposed by the PPF. TfL claims the levy is "unreasonable", and other DB providers with similar concerns about the unfairness of the levy will no doubt be awaiting the outcome with interest.
And today it emerges that the Fund's deficit more than doubled in the year to March 2009, from £517 million to £1.23 billion, prompting – according to the Telegraph – "questions about the viability of Britain's pensions lifeboat".
Before anyone presses the panic button, however, it's worth bearing a couple of things in mind. Firstly, as PPF Chief Executive Alan Rubenstein recently pointed out, the PPF is currently paying out around £7m a month to its 13,000 beneficiaries, and while these numbers will increase in the coming months, the Fund already has some £3bn in assets, so "let's not pretend there are not extreme scenarios out there that could see us run out of money, but that will not be happening in the foreseeable future".
And secondly, Mr Rubenstein and his colleagues are smart enough to have learned from the American experience. The US equivalent of the PPF, the Pension Benefits Guaranty Corporation was set up in the mid seventies, and has amassed an eye-watering $33 billion deficit. Even so, the debate in Washington is around how to fix the PBGC, not how to get rid of it. What politician, after all, would want to be seen as the individual who allowed a lifeboat to sink?
AF
Wednesday, November 4, 2009
(You gotta) fight for the right to (counter)party
Who would have thought that white-boy hip-hop could hold a mirror up to the financial markets...no, not me either. Firstly, we've got the Beastie Boys fighting for the right to a (central) counterparty and then InterContinentalExchange (ICE) leading the chorus of Vanilla Ice's 90s anthem "Ice Ice Baby". Post-Lehmans ("PL" – that's right we're coining a new acronym right here, right now) the concept of counterparty risk came to the fore – it always existed, it's just that people didn't really expect giant banking institutions to fail.
Not for the first time, the market was spectacularly wrong. Either way, the successful transfer of trades PL overcame a major hurdle in the clean-up operation and marked the clearing and settlement operations that underpin many markets as one of the few success stories of last year. This was not only true of equities but also the centrally cleared futures and OTC interest rate swaps, which were swiftly reallocated without loss to counterparties and without disruption. On the other hand, Lehman's unregulated credit default swaps and non-cleared interest rate swaps brought chaos to the market. The case for centralised clearing and the danger of defaulting counterparties was duly presented and the debate has rumbled on behind the scenes ever since.
Now, counterparty risk and centralised clearing have again been cast centre stage, with moves afoot on Capitol Hill to institute sweeping changes to the structure and regulation of the massive OTC derivatives business. Citadel's influential CEO Kenneth Griffin has been quick to weigh into the debate and called for the overturn of the 'merchants of status quo' and the worth of the centralised clearing model. Granted, his motives are probably not entirely altruistic – after all, this is the same Citadel that has a joint venture with the CME to clear credit. Self-interest aside, clearing is definitely back on everyone's lips – from exchanges to regulators to banks to hedge funds.
ICE, the futures exchange group, has been swift to react to the new world order and forged ahead in the race to clear credit default swaps. The group announced yesterday that nearly all new CDS contracts would be cleared centrally by the end of the month. This is impressive stuff and as Hal Weitzman writes in today's FT: "ICE has taken a strong lead amongst exchanges". This is probably a wise decision and as Jeremy Grant relayed earlier in the week: "governments and regulators in the US and Europe have made wider use of clearing – particularly in the over-the-counter derivatives market – a pillar of reform of financial markets." ICE has stolen a march on their competitors and given their relationships and collaboration with the main CDS dealers has reportedly cleared more than 43,000 index trades in Europe and the US with a notional value of more than $3,5000bn.
This is a big, lucrative market and Jeff Sprecher, ICE's chief executive, has been in an understandably buoyant mood of late. Does this signal a return to confidence in the credit derivatives market? Perhaps so...in which case – ICE ICE Baby indeed.
JS
Not for the first time, the market was spectacularly wrong. Either way, the successful transfer of trades PL overcame a major hurdle in the clean-up operation and marked the clearing and settlement operations that underpin many markets as one of the few success stories of last year. This was not only true of equities but also the centrally cleared futures and OTC interest rate swaps, which were swiftly reallocated without loss to counterparties and without disruption. On the other hand, Lehman's unregulated credit default swaps and non-cleared interest rate swaps brought chaos to the market. The case for centralised clearing and the danger of defaulting counterparties was duly presented and the debate has rumbled on behind the scenes ever since.
Now, counterparty risk and centralised clearing have again been cast centre stage, with moves afoot on Capitol Hill to institute sweeping changes to the structure and regulation of the massive OTC derivatives business. Citadel's influential CEO Kenneth Griffin has been quick to weigh into the debate and called for the overturn of the 'merchants of status quo' and the worth of the centralised clearing model. Granted, his motives are probably not entirely altruistic – after all, this is the same Citadel that has a joint venture with the CME to clear credit. Self-interest aside, clearing is definitely back on everyone's lips – from exchanges to regulators to banks to hedge funds.
ICE, the futures exchange group, has been swift to react to the new world order and forged ahead in the race to clear credit default swaps. The group announced yesterday that nearly all new CDS contracts would be cleared centrally by the end of the month. This is impressive stuff and as Hal Weitzman writes in today's FT: "ICE has taken a strong lead amongst exchanges". This is probably a wise decision and as Jeremy Grant relayed earlier in the week: "governments and regulators in the US and Europe have made wider use of clearing – particularly in the over-the-counter derivatives market – a pillar of reform of financial markets." ICE has stolen a march on their competitors and given their relationships and collaboration with the main CDS dealers has reportedly cleared more than 43,000 index trades in Europe and the US with a notional value of more than $3,5000bn.
This is a big, lucrative market and Jeff Sprecher, ICE's chief executive, has been in an understandably buoyant mood of late. Does this signal a return to confidence in the credit derivatives market? Perhaps so...in which case – ICE ICE Baby indeed.
JS
Playing ketchup
M&S has reported sterling figures this morning. Great news for me, I am a share holder (albeit of about 2 shares) but that isn't the half of it..........
The best news I have heard so far this week amongst the doom and gloom of the usual business stories and the continued injection of cash into ailing banks (but that is another story) is that Marks and Spencer is to expand the sale of branded goods from a select number of stores to more than 600 stores across the UK. I am hoping this includes my local.
For years I think M&S have been missing a trick. You see the M&S own branded ketchup just isn't quite up to it. And the fact that you could buy a ready meal of the highest quality and a t-shirt at the same time was beginning to lose its appeal. I made the move from M&S to Waitrose so that I could get different brands but now I am going back and fast.
According to Mysupermarket I will also save some pennies. M&S is cheaper than Waitrose on 1,200 lines although Waitrose has retaliated by saying it is 6% cheaper on the other lines – we'll see. The battle for market share between these two quality food outlets has begun but I know where my loyalties lie........
LW
The best news I have heard so far this week amongst the doom and gloom of the usual business stories and the continued injection of cash into ailing banks (but that is another story) is that Marks and Spencer is to expand the sale of branded goods from a select number of stores to more than 600 stores across the UK. I am hoping this includes my local.
For years I think M&S have been missing a trick. You see the M&S own branded ketchup just isn't quite up to it. And the fact that you could buy a ready meal of the highest quality and a t-shirt at the same time was beginning to lose its appeal. I made the move from M&S to Waitrose so that I could get different brands but now I am going back and fast.
According to Mysupermarket I will also save some pennies. M&S is cheaper than Waitrose on 1,200 lines although Waitrose has retaliated by saying it is 6% cheaper on the other lines – we'll see. The battle for market share between these two quality food outlets has begun but I know where my loyalties lie........
LW
Tuesday, November 3, 2009
Ucits or lose it: life on the hedge
Right now Ucits are hotter than Brad Pitt and Angelina Jolie in a sauna as hedgies fire off new funds into the market left, right and centre. About 75 to 100 Ucits funds are estimated to have been launched to date, a figure that rises to around 300 when Ucits hedge funds are taken into account. The sudden craze is partly due to high profile hedge fund names such as Man Group, Brevan Howard and GLG Partners launching replicas of their existing hedge funds in the Ucits III format. Some have claimed that hedgies are tapping into the Ucits space in a bid to trump the draft EU directive on Alternative Investment Managers due to come into force next year, whilst others say that hedge funds are keen to expand their investor base. But some industry pundits have urged caution that the conversion of complex hedge funds into Ucits funds could expose smaller investors to hidden risks.
Hedge funds will need to change their business model in order to survive..."transform or die" is a cry often heard in the press. But does the entry of hedge funds into the regulated, onshore Ucits space not threaten the traditional offshore unregulated hedge fund model? Could this be a sign that the traditional hedge fund model is becoming obsolete?
NB
Hedge funds will need to change their business model in order to survive..."transform or die" is a cry often heard in the press. But does the entry of hedge funds into the regulated, onshore Ucits space not threaten the traditional offshore unregulated hedge fund model? Could this be a sign that the traditional hedge fund model is becoming obsolete?
NB
Monday, November 2, 2009
Why don't you just switch on your television set....?
Why isn't more PR effort focused towards broadcast media? From their behaviour it would seem that many PRs and their clients believe that broadcast is not a worthwhile medium. But the reality is that broadcast media dwarfs print media in terms of audience size and breadth. Around 65% of UK adults rely on TV news as their primary source of news, BBC One’s 6pm News and ITN’s 6.30pm News have 10 million viewers each night between them, and around 2.2 million people are listening to BBC Radio Four's Today Programme at 8am each morning. Compare this to the circulation of the Telegraph (around 800,000 at the peak of the MPs' expenses coverage) or Financial Times (around 400,000 and falling) and you begin to wonder why more PR teams are not focusing more effort on broadcast than on print.
There are many TV and radio programmes with large audiences that have financial content which requires expert commentators to appear as guests on the show. The most obvious is the 6.15am markets report on the Today Programme each morning, where a leading fund manager gives his or her view on the company news of the day – around one million educated, home owning, people mostly over the age of 40 are listening. If you could sell advertising during this slot ads would cost a six figure sum, but perplexingly the BBC find it difficult to find a pool of more than about 20 fund managers able and willing to speak for free. Wake up to Money (Five Live from 5.30am to 6am) has a similar slot and around 250,000 financially minded listeners tune in each morning to hear Andrew Verity and Micky Clarke's dulcet tones.
So how might PR teams go about taking advantage of the largely undervalued medium of broadcast? Clearly a different approach to print media is needed as press releases become largely redundant and the whole process really revolves around having a good expert commentator available for all those guest speaker slots. For this it is necessary to have a spokesperson who is articulate and able to explain complex issues in a way that the layman can understand. Once chosen specialist broadcast media training must be undertaken to fully prepare them. Equally important is that the spokesperson has to be willing and able to do any slots, anytime, at short notice – starting on smaller programmes before progressing to flagship ones and being aware that turning down opportunities (even at a few hours notice) means that they are unlikely to be offered a second opportunity.
If this can be achieved then you are ready to start putting them forwards and finding opportunities for them to appear on the TV and radio. It can take a little while to gain some initial momentum, but once underway you will quickly begin seeing and hearing your company name appear on the airwaves and reaching large audiences.
RT
There are many TV and radio programmes with large audiences that have financial content which requires expert commentators to appear as guests on the show. The most obvious is the 6.15am markets report on the Today Programme each morning, where a leading fund manager gives his or her view on the company news of the day – around one million educated, home owning, people mostly over the age of 40 are listening. If you could sell advertising during this slot ads would cost a six figure sum, but perplexingly the BBC find it difficult to find a pool of more than about 20 fund managers able and willing to speak for free. Wake up to Money (Five Live from 5.30am to 6am) has a similar slot and around 250,000 financially minded listeners tune in each morning to hear Andrew Verity and Micky Clarke's dulcet tones.
So how might PR teams go about taking advantage of the largely undervalued medium of broadcast? Clearly a different approach to print media is needed as press releases become largely redundant and the whole process really revolves around having a good expert commentator available for all those guest speaker slots. For this it is necessary to have a spokesperson who is articulate and able to explain complex issues in a way that the layman can understand. Once chosen specialist broadcast media training must be undertaken to fully prepare them. Equally important is that the spokesperson has to be willing and able to do any slots, anytime, at short notice – starting on smaller programmes before progressing to flagship ones and being aware that turning down opportunities (even at a few hours notice) means that they are unlikely to be offered a second opportunity.
If this can be achieved then you are ready to start putting them forwards and finding opportunities for them to appear on the TV and radio. It can take a little while to gain some initial momentum, but once underway you will quickly begin seeing and hearing your company name appear on the airwaves and reaching large audiences.
RT
Thursday, October 22, 2009
Beer and Mortar
House prices are rising again. Oh wait a minute, they've still got 17 per cent to fall. Ah, but we're alright because a 'survey of estate agents' has told us they are confident about the market again. (Who'd have thought?). Property and personal finance correspondents must be getting giddy by now as ratings agencies, building societies, the Land Registry and the Royal Institute of Chartered Surveyors continue to churn out their daily contradictory housing market research.
But just as we were getting bored of the 'are they or aren't they' debate, the regulator this week announced its latest initiative to prevent a re-run of the irresponsible lending that fuelled a large part of this decade's housing market boom. As part of its mortgage market review the FSA has proposed that mortgage applicants must disclose exactly what they spend in a typical week when they apply for a mortgage. And yes, that includes admitting to how many pints of beer you drink on a Friday night.
Now I'm not afraid to tell my mortgage lender how much I spend on shoes and wine – and thankfully I haven't taken up smoking since I last applied for a mortgage - but it's hardly a carrot for those all important buyers trying to get onto the housing ladder. Nor is it likely to revive the market by encouraging the banks and building societies to increase the number of home loans they offer – something that the government is trying to encourage. Sounds like another contradiction to me.
But there's mortar life than house prices.
LW
But just as we were getting bored of the 'are they or aren't they' debate, the regulator this week announced its latest initiative to prevent a re-run of the irresponsible lending that fuelled a large part of this decade's housing market boom. As part of its mortgage market review the FSA has proposed that mortgage applicants must disclose exactly what they spend in a typical week when they apply for a mortgage. And yes, that includes admitting to how many pints of beer you drink on a Friday night.
Now I'm not afraid to tell my mortgage lender how much I spend on shoes and wine – and thankfully I haven't taken up smoking since I last applied for a mortgage - but it's hardly a carrot for those all important buyers trying to get onto the housing ladder. Nor is it likely to revive the market by encouraging the banks and building societies to increase the number of home loans they offer – something that the government is trying to encourage. Sounds like another contradiction to me.
But there's mortar life than house prices.
LW
Wednesday, October 21, 2009
Too big to fail?
Mervyn King's impassioned address to Scottish business organisations yesterday has been described as a declaration of war on the banking industry which is fair enough considering his decision to paraphrase Sir Winston Churchill.
King's cri de coeur has been brewing for some time. Regulators and policy makers around the world have recognised that in pulling the financial system back from the brink we have created a new predicament. Previously, banks may have suspected that central banks would bail them out if they got into trouble but recent intervention has now proven that banks can indulge in risky business without risking salvation from the taxpayer.
King said that "The 'too important to fail' problem is too important to ignore" and that "The massive support extended to the banking sector around the world...has created possibly the biggest moral hazard in history". The powerful rhetoric employed in his speech shows how much is at stake if regulators waste this opportunity with ineffective reforms.
Little over a year ago, when Lehman's employees were looting office buildings and the rest of us were contemplating what it would be like to live through another great depression, there was a sense that these events would mark a sea change in financial services. Reform was long overdue and the industry as we then knew it would be a much different beast in the future. A year hence though, what has actually changed? With the return of bonuses and the recovery of risky assets, there is little sense that any lessons have been learned or that the culture of financial services has much altered.
King's speech may have focussed on banking but it speaks to a much bigger problem. Now the industry is back on its feet and making money the impetus for reform has been lost. Self-interest once again dominates discussions and the topic of regulatory reform is being turned into a showcase for politicians. Policy makers must recognise that more regulation is not necessarily better regulation and engage in open and honest dialogue, not polemics and posturing.
The battle over how best to address the 'too big to fail' quandary is a worthy fight but is just one conflict in a much bigger war that must be waged if we are to avoid another crisis of this scale.
NS
King's cri de coeur has been brewing for some time. Regulators and policy makers around the world have recognised that in pulling the financial system back from the brink we have created a new predicament. Previously, banks may have suspected that central banks would bail them out if they got into trouble but recent intervention has now proven that banks can indulge in risky business without risking salvation from the taxpayer.
King said that "The 'too important to fail' problem is too important to ignore" and that "The massive support extended to the banking sector around the world...has created possibly the biggest moral hazard in history". The powerful rhetoric employed in his speech shows how much is at stake if regulators waste this opportunity with ineffective reforms.
Little over a year ago, when Lehman's employees were looting office buildings and the rest of us were contemplating what it would be like to live through another great depression, there was a sense that these events would mark a sea change in financial services. Reform was long overdue and the industry as we then knew it would be a much different beast in the future. A year hence though, what has actually changed? With the return of bonuses and the recovery of risky assets, there is little sense that any lessons have been learned or that the culture of financial services has much altered.
King's speech may have focussed on banking but it speaks to a much bigger problem. Now the industry is back on its feet and making money the impetus for reform has been lost. Self-interest once again dominates discussions and the topic of regulatory reform is being turned into a showcase for politicians. Policy makers must recognise that more regulation is not necessarily better regulation and engage in open and honest dialogue, not polemics and posturing.
The battle over how best to address the 'too big to fail' quandary is a worthy fight but is just one conflict in a much bigger war that must be waged if we are to avoid another crisis of this scale.
NS
Thursday, October 15, 2009
Shake your moneymaker
Amidst much hand-wringing over the slump in sterling over recent months, perhaps it's worth taking a slightly broader view of currency. A good while ago, our ancestors were looking for a medium of exchange to trade goods, and experimented with various things such as furs, stones, iron bars and blocks of salt. All proved to be fairly unsuccessful until gold evolved to be the most practical medium. For many years, most currencies were backed by physical gold, and the price of gold determined the value of a currency.
In today's society, the basic act of commerce has not changed, but entrepreneurs try to find new alternative ways to facilitate transactions. With the help of their new own currency, local retailers in Brixton hope to boost spending in the area, and this is just a recent example of a long list of micro-money and local denominations. There are more than 2,500 different local currency systems worldwide. All for a reason, probably.
The Internet has also created a range of digital currencies to be able to sell and pay for goods online. The Wall Street Journal recently produced a video covering this new world of peer to peer finance which also features our partner Hub Culture’s Ven, the only digital currency that can be used both online and off.
Whether this is the future of currencies, and the future of money indeed, remains to be seen. Clearly, the way we're going to pay for goods in the future is tightly connected to the way we'll interact and communicate in the future. And as far as this can be assessed today, there is an irreversible trend towards an even more digital life as we know it.
RR
Tuesday, October 13, 2009
Alienate the Veteran Voter at your peril….
Is the Telegraph being a bit churlish today, in reporting "anger as state pension rises by just £2.40 a week"? Fair enough, £2.40 a week is not a lot, nor is the £97.65 a week that state pension recipients will get from next April.
But if the then Chancellor, Gordon Brown, hadn't changed the rules in 2001, the state pension may not have gone up at all. The increase has, for many years, been linked to the increase in the September Retail Price Index which, as the Office for National Statistics announced this morning, actually fell by 1.4% last month.
Mr Brown's 2001 change meant the pension would increase by the September inflation rate or 2.5%, whichever is the higher. A point the Telegraph overlooked today. Along with the fact that it was Mrs Thatcher's administration which pegged pension increases to prices back in 1980. Before that, the benchmark was based on whichever was the higher between prices and earnings. Of course, the latter have outstripped the former fairly consistently since 1980, so the state pension, as a percentage of average earnings, fell from over 23% in 1981 to less than 16% by 2006.
In the interests of scrupulous impartiality, however, I should refer you to the same newspaper's coverage of David Cameron's commitment, announced last month, to match the government's intention of restoring the earnings link by 2015 at the latest. As a shrewd politician, Mr Cameron is all too aware of the power of the grey vote at next year's election.
AF
But if the then Chancellor, Gordon Brown, hadn't changed the rules in 2001, the state pension may not have gone up at all. The increase has, for many years, been linked to the increase in the September Retail Price Index which, as the Office for National Statistics announced this morning, actually fell by 1.4% last month.
Mr Brown's 2001 change meant the pension would increase by the September inflation rate or 2.5%, whichever is the higher. A point the Telegraph overlooked today. Along with the fact that it was Mrs Thatcher's administration which pegged pension increases to prices back in 1980. Before that, the benchmark was based on whichever was the higher between prices and earnings. Of course, the latter have outstripped the former fairly consistently since 1980, so the state pension, as a percentage of average earnings, fell from over 23% in 1981 to less than 16% by 2006.
In the interests of scrupulous impartiality, however, I should refer you to the same newspaper's coverage of David Cameron's commitment, announced last month, to match the government's intention of restoring the earnings link by 2015 at the latest. As a shrewd politician, Mr Cameron is all too aware of the power of the grey vote at next year's election.
AF
Monday, October 12, 2009
Commodity oddity....Citi loses the energy to trade
There's an old investment adage that says 'run your winners and cut your losers' – a refreshingly simple concept for an industry that often does its best to confuse and befuddle. Lately however, this truism has been challenged by the two words that will terrify even the most hardened of bankers – 'executive compensation.' Citi's decision to sell Phibro, its energy trading division, has clearly been motivated by little else than regulatory pressure.
Phibro is a consistently profitable business (I know, how many can say that these days?) that has netted Citi around $371m a year in annual earnings over the past five years. This, as Anthony Currie of breakingviews highlighted: "equates to a profit margin of more than 50%, and has been a bright spot in the last couple of years as Citi posted billions of dollars in losses elsewhere." Granted, Phibro is not a huge business given the monolithic scale of Citigroup. Nevertheless, profits are profits and it was nice to see that a division could stand strong while the rest of Citi's edifice seemingly crumbled.
Occidental Petroleum, the energy and chemical giant, picked up Phibro for just $250m, which many market observers have described as "a pittance" considering the profits it once netted the bank. That said, the sale is not exactly a surprise given Citi's political and economic situation: a troubled bank propped up by the US taxpayer, an obligation to pay star trader Andrew Hall a whopping bonus of $100m, and a government that has executive pay firmly in its sights. Not exactly peaches and roses for the folks at Citi. So, to be fair to their embattled CEO Vikram Pandit, the pressure to hive off Phibro was so overwhelming that to do otherwise would have been untenable.
It's not actually the sale of Phibro that's alarming, as it was undeniably a forced hand, but rather the political machinations that promoted the sale. We all know the era of light touch regulation is behind us but politics and economics don't often make good bedfellows. In a fiery research note from Rochdale Securities' Richard Bove, dramatically titled "Socialism in Action", he argues that the sale does not make good business sense. Bove says the decision was not in the interest of the Citigroup shareholders and "also sets the pattern of what may prove to be a series of similar actions by other banks reacting to the government takeover of the banking industry." It's this aspect, rather than his socialist rant, that's of note and as FT's Alphaville concludes: "the regulatory environment for banks, and the government's tolerance for the high-risk, high-reward model of years past, is changing and not necessarily in what some bank-shareholders see as their interests."
The whole affair also throws the spotlight on the world of commodities trading and the growing band of non-financial players, including producers, dedicated commodity trading houses and utilities, who play an increasingly influential role in the energy trading markets. Many of these companies can dominate sectors of the energy markets, derivative as well as physical, without the same transparency and scrutiny that a bank is under.
Occidental's purchase of Phibro is illustrative of a wider shift in the commodities business and as the FT describes: "the latest episode in an exodus of specialised commodity trading talent from banks coping with greater government say over compensation." After all, why stay at an investment bank and face the constant ire of regulators when you can quietly trade elsewhere and continue to pick up huge pay packages. The FT says that "we live in Financial Times" – more like strange times if you ask me.
JS
Phibro is a consistently profitable business (I know, how many can say that these days?) that has netted Citi around $371m a year in annual earnings over the past five years. This, as Anthony Currie of breakingviews highlighted: "equates to a profit margin of more than 50%, and has been a bright spot in the last couple of years as Citi posted billions of dollars in losses elsewhere." Granted, Phibro is not a huge business given the monolithic scale of Citigroup. Nevertheless, profits are profits and it was nice to see that a division could stand strong while the rest of Citi's edifice seemingly crumbled.
Occidental Petroleum, the energy and chemical giant, picked up Phibro for just $250m, which many market observers have described as "a pittance" considering the profits it once netted the bank. That said, the sale is not exactly a surprise given Citi's political and economic situation: a troubled bank propped up by the US taxpayer, an obligation to pay star trader Andrew Hall a whopping bonus of $100m, and a government that has executive pay firmly in its sights. Not exactly peaches and roses for the folks at Citi. So, to be fair to their embattled CEO Vikram Pandit, the pressure to hive off Phibro was so overwhelming that to do otherwise would have been untenable.
It's not actually the sale of Phibro that's alarming, as it was undeniably a forced hand, but rather the political machinations that promoted the sale. We all know the era of light touch regulation is behind us but politics and economics don't often make good bedfellows. In a fiery research note from Rochdale Securities' Richard Bove, dramatically titled "Socialism in Action", he argues that the sale does not make good business sense. Bove says the decision was not in the interest of the Citigroup shareholders and "also sets the pattern of what may prove to be a series of similar actions by other banks reacting to the government takeover of the banking industry." It's this aspect, rather than his socialist rant, that's of note and as FT's Alphaville concludes: "the regulatory environment for banks, and the government's tolerance for the high-risk, high-reward model of years past, is changing and not necessarily in what some bank-shareholders see as their interests."
The whole affair also throws the spotlight on the world of commodities trading and the growing band of non-financial players, including producers, dedicated commodity trading houses and utilities, who play an increasingly influential role in the energy trading markets. Many of these companies can dominate sectors of the energy markets, derivative as well as physical, without the same transparency and scrutiny that a bank is under.
Occidental's purchase of Phibro is illustrative of a wider shift in the commodities business and as the FT describes: "the latest episode in an exodus of specialised commodity trading talent from banks coping with greater government say over compensation." After all, why stay at an investment bank and face the constant ire of regulators when you can quietly trade elsewhere and continue to pick up huge pay packages. The FT says that "we live in Financial Times" – more like strange times if you ask me.
JS
Thursday, October 8, 2009
Old age isn't so bad when you consider the alternative
George Osborne's proposals on raising the state pension age have helped bring the longevity issue into sharper focus this week, and not before time. An interesting feature of the general reaction to Mr Osborne's comments is the relative equanimity with which the idea has been greeted – even The Guardian approved.
The state pension age has remained unchanged (at 65 for men and, at the moment, 60 for women) since the 1940's. Given that average life expectancy has been increasing by some two years every decade since then, it seems ludicrous that pension ages have failed to keep track. Even allowing for some quite extreme regional variations (figures from Punter Southall show male life expectancy is nearly 84 in Kensington and Chelsea, but only 70 in Glasgow), neither the demographics nor the economics add up.
Clearly, and regardless of who wins next year's election, this will have to change. Post-war UK births peaked at just over one million in 1964. Put another way, more Britons are celebrating their 45th birthday this year than any other age. As a member of that particular cohort, I have to say you'd be hard pressed to find a finer, more upstanding body of men and women. But if all of us retire in 2029, our creaking pension system – already severely stretched – could be brought to its arthritic knees.
So maybe the best way to look at this is, as Hamish Mcrae wrote in yesterday's Independent, to embrace the fact that we are an ageing society, and recognise that "countries that adapt well to ageing, which is happening to every society in the developed world, will become richer, healthier, better balanced and in all probability happier communities than those that fail to tackle an inevitable and indeed welcome feature of this century."
AF
The state pension age has remained unchanged (at 65 for men and, at the moment, 60 for women) since the 1940's. Given that average life expectancy has been increasing by some two years every decade since then, it seems ludicrous that pension ages have failed to keep track. Even allowing for some quite extreme regional variations (figures from Punter Southall show male life expectancy is nearly 84 in Kensington and Chelsea, but only 70 in Glasgow), neither the demographics nor the economics add up.
Clearly, and regardless of who wins next year's election, this will have to change. Post-war UK births peaked at just over one million in 1964. Put another way, more Britons are celebrating their 45th birthday this year than any other age. As a member of that particular cohort, I have to say you'd be hard pressed to find a finer, more upstanding body of men and women. But if all of us retire in 2029, our creaking pension system – already severely stretched – could be brought to its arthritic knees.
So maybe the best way to look at this is, as Hamish Mcrae wrote in yesterday's Independent, to embrace the fact that we are an ageing society, and recognise that "countries that adapt well to ageing, which is happening to every society in the developed world, will become richer, healthier, better balanced and in all probability happier communities than those that fail to tackle an inevitable and indeed welcome feature of this century."
AF
Wednesday, September 30, 2009
Electioneering
"I will stop, I will stop at nothing
Say the right things, when electioneering
I trust I can rely on your vote
When I go forwards you go backwards and somewhere we will meet
Riot shields, voodoo economics
It's just business, cattle prods and the IMF
I trust I can rely on your vote
When I go forwards you go backwards and somewhere we will meet"
Radiohead penned 'Electioneering' back in 1997, shortly after Tony Blair's New Labour government came to power. Despite the cynicism of Oxford's favourite miserablists, there was a sense of general optimism in the air. How things have changed. Their lyrics seem more prescient than ever given Gordon Brown's desperate attempt to rally the troops yesterday in Brighton. Although his speech was certainly defiant, the whiff of electioneering was overpowering.
Brown slammed the City as "ideologically bankrupt" in a speech strewn with rhetoric designed to appeal to Middle England and mobilise core support. His assertion that the credit crisis was a failure of rightwing Conservative ideology certainly left a bitter taste in the mouth. He claimed that "what let the world down" was "the Conservative idea that markets always self-correct but never self-destruct". He then blamed the "right-wing fundamentalism that says you just leave everything to the market and says that free markets should not just be free but values-free".
This element of his speech was, at best, what Hollywood might term a 're-imagining' of the current financial predicament and, at worst, a distortion of the truth. It takes a unique kind of amnesia to completely neglect "his own 10-year record as chancellor – when he championed City interests". After all, Brown is a man who had previously spent years advocating and championing a 'light touch' regulatory system and the notion that the market is a more efficient allocator of capital than the state. Robert Peston snappily articulated this state of affairs in his blog today – "Brown snubs Brown". He outlined that whilst the PM's comments were intended as an attack on the Tories, they really just "put the boot into the Brown years at Number 11".
To be fair, lots of people felt exactly the same way about the City during the economic boom, but for a PM who has demanded financial accountability, previously called for an end of the "age of irresponsibility", and even written a book looking at courage, he has probably emerged from this in a less than heroic light. That said, Sarah Brown felt otherwise as she exclaimed "My husband. My hero!"
A more profitable line of argument for the PM, and one which he developed in yesterday's speech, may be to attack the Conservatives over their lack of economic credibility. As today's Independent points out, "the Prime Minister did have a strong case to make about the hesitant and confused manner in which the Tories reacted to last year's global financial meltdown". In pursuing this line, he would, at least, put the onus back on David Cameron to explain how the Conservatives' calls over recent years for even-lighter-touch financial regulation would have helped to avert the crisis.
JS
Say the right things, when electioneering
I trust I can rely on your vote
When I go forwards you go backwards and somewhere we will meet
Riot shields, voodoo economics
It's just business, cattle prods and the IMF
I trust I can rely on your vote
When I go forwards you go backwards and somewhere we will meet"
Radiohead penned 'Electioneering' back in 1997, shortly after Tony Blair's New Labour government came to power. Despite the cynicism of Oxford's favourite miserablists, there was a sense of general optimism in the air. How things have changed. Their lyrics seem more prescient than ever given Gordon Brown's desperate attempt to rally the troops yesterday in Brighton. Although his speech was certainly defiant, the whiff of electioneering was overpowering.
Brown slammed the City as "ideologically bankrupt" in a speech strewn with rhetoric designed to appeal to Middle England and mobilise core support. His assertion that the credit crisis was a failure of rightwing Conservative ideology certainly left a bitter taste in the mouth. He claimed that "what let the world down" was "the Conservative idea that markets always self-correct but never self-destruct". He then blamed the "right-wing fundamentalism that says you just leave everything to the market and says that free markets should not just be free but values-free".
This element of his speech was, at best, what Hollywood might term a 're-imagining' of the current financial predicament and, at worst, a distortion of the truth. It takes a unique kind of amnesia to completely neglect "his own 10-year record as chancellor – when he championed City interests". After all, Brown is a man who had previously spent years advocating and championing a 'light touch' regulatory system and the notion that the market is a more efficient allocator of capital than the state. Robert Peston snappily articulated this state of affairs in his blog today – "Brown snubs Brown". He outlined that whilst the PM's comments were intended as an attack on the Tories, they really just "put the boot into the Brown years at Number 11".
To be fair, lots of people felt exactly the same way about the City during the economic boom, but for a PM who has demanded financial accountability, previously called for an end of the "age of irresponsibility", and even written a book looking at courage, he has probably emerged from this in a less than heroic light. That said, Sarah Brown felt otherwise as she exclaimed "My husband. My hero!"
A more profitable line of argument for the PM, and one which he developed in yesterday's speech, may be to attack the Conservatives over their lack of economic credibility. As today's Independent points out, "the Prime Minister did have a strong case to make about the hesitant and confused manner in which the Tories reacted to last year's global financial meltdown". In pursuing this line, he would, at least, put the onus back on David Cameron to explain how the Conservatives' calls over recent years for even-lighter-touch financial regulation would have helped to avert the crisis.
JS
Thursday, September 24, 2009
"I'm not afraid of death. I just don't want to be there when it happens."
Woody Allen can be relied on to reflect the concerns of many of us when it comes to death. He also said "I don't want to achieve immortality through my work. I want to achieve it by not dying."
According to claims made by American scientist Raymond_Kurzweil, 73-year old Mr Allen may yet just about get his wish. Writing in The Sun today, Mr Kurzweil (who, it should be noted, has a book to flog) suggests that the pace of developments in nanotechnology could mean man becoming immortal within 20 years.
This raises all kinds of intriguing questions – medical, philosophical and otherwise. On the face of it, you'd have to see this as a good news story – no more deaths from cancer or heart disease or whatever. But there are downsides. As Bryony Gordon writes in today's Telegraph, "I'm not convinced that I want to live forever. After all, how do you feel alive when you know that you're never going to die?"
And goodness only knows how Mr Kurzweil's prediction will impact on the pensions and insurance industries. Actuaries, pension managers and insurance providers have struggled with the implications of life expectancy increasing at the rate of two years every decade in the UK, let alone the concept of death becoming obsolete. What happens to everyone in the pensions and insurance industries if no-one dies? I suppose at least we'll all have plenty of time to re-train.
AF
According to claims made by American scientist Raymond_Kurzweil, 73-year old Mr Allen may yet just about get his wish. Writing in The Sun today, Mr Kurzweil (who, it should be noted, has a book to flog) suggests that the pace of developments in nanotechnology could mean man becoming immortal within 20 years.
This raises all kinds of intriguing questions – medical, philosophical and otherwise. On the face of it, you'd have to see this as a good news story – no more deaths from cancer or heart disease or whatever. But there are downsides. As Bryony Gordon writes in today's Telegraph, "I'm not convinced that I want to live forever. After all, how do you feel alive when you know that you're never going to die?"
And goodness only knows how Mr Kurzweil's prediction will impact on the pensions and insurance industries. Actuaries, pension managers and insurance providers have struggled with the implications of life expectancy increasing at the rate of two years every decade in the UK, let alone the concept of death becoming obsolete. What happens to everyone in the pensions and insurance industries if no-one dies? I suppose at least we'll all have plenty of time to re-train.
AF
Friday, August 14, 2009
DB or not DB? That isn't the question
No great surprises in yesterday's report from KPMG, on the funding position of the top UK DB pension schemes, but interesting that they feel the "tipping point" has been reached, at which schemes are paying out more on retired scheme members' benefits than on current members' benefits. What's more, 22% of the top DB schemes "face no prospect of clearing pension deficits from discretionary cashflow over any reasonable time period" – a sobering thought given that cashflows are unlikely to improve in the foreseeable future.
The findings echo the views of senior figures in the pensions and investment industries revealed in a Penrose survey earlier this week, of whom 94% thought private sector DB schemes are "unsustainable" and would close to existing members for future accruals in the next couple of years.
With DB schemes seemingly being closed on a "weekly basis", the end of DB provision in the private sector looks to have been factored in by most commentators as pretty much a fait accompli. The debate instead is moving towards what will replace DB schemes. Here the picture is much less clear cut. Many fear employers will revert to DC schemes with contributions levelled down to the minimum prescribed under the Personal Accounts system. Others, such as Adrian Waddingham interviewed in FTfm this week, feel some will bring in some form of hybrid scheme, comprising elements of DB and DC.
The real "tipping point" in all this has more to do with the shift in the balance of risk between the employer and the individual. It's about the labour market and life expectancy. During the post-war period, when many of the DB schemes now facing closure were originally set up, there was a shortage of labour, so employers introduced final salary pensions as a way of attracting workers. Life expectancy for the average UK male was somewhere in the low seventies, so the cost of providing this benefit to people retiring at 65 was relatively low. Nowadays, with unemployment at 2.4 million and rising, employers don't need to go to such generous lengths to attract staff. And with life expectancy in the mid-eighties (and also rising), but retirement age still 65, the cost to employers is significantly greater. To put simply, if a trifle brutally: in 2009 can any rational employer justify offering a DB pension as an employee benefit? The answer, sadly, seems to be a resounding "No".
CM
The findings echo the views of senior figures in the pensions and investment industries revealed in a Penrose survey earlier this week, of whom 94% thought private sector DB schemes are "unsustainable" and would close to existing members for future accruals in the next couple of years.
With DB schemes seemingly being closed on a "weekly basis", the end of DB provision in the private sector looks to have been factored in by most commentators as pretty much a fait accompli. The debate instead is moving towards what will replace DB schemes. Here the picture is much less clear cut. Many fear employers will revert to DC schemes with contributions levelled down to the minimum prescribed under the Personal Accounts system. Others, such as Adrian Waddingham interviewed in FTfm this week, feel some will bring in some form of hybrid scheme, comprising elements of DB and DC.
The real "tipping point" in all this has more to do with the shift in the balance of risk between the employer and the individual. It's about the labour market and life expectancy. During the post-war period, when many of the DB schemes now facing closure were originally set up, there was a shortage of labour, so employers introduced final salary pensions as a way of attracting workers. Life expectancy for the average UK male was somewhere in the low seventies, so the cost of providing this benefit to people retiring at 65 was relatively low. Nowadays, with unemployment at 2.4 million and rising, employers don't need to go to such generous lengths to attract staff. And with life expectancy in the mid-eighties (and also rising), but retirement age still 65, the cost to employers is significantly greater. To put simply, if a trifle brutally: in 2009 can any rational employer justify offering a DB pension as an employee benefit? The answer, sadly, seems to be a resounding "No".
CM
Wednesday, August 12, 2009
Back to the bad old days?
Today's UK unemployment figures make for grim reading. Nearly two and a half million Britons are out of work, the highest figure since the mid nineties, accounting for 7.8% of the workforce. What's more, the data emerges amidst dire warnings of continuing deterioration in the jobs market into 2010 and beyond.
For those of us old enough to remember the 1980's, when unemployment was well over 3 million, one of the striking differences between then and now is the relative scarcity of cultural references to the jobless. Where is today's television equivalent of Alan Bleasdale's Boys_from_the_Blackstuff? Who is recording the noughties versions of The Specials' Ghost Town or UB40's One in Ten? (Admittedly "One in Twelve point Eight" doesn't scan well, but you get my drift.)
Perhaps the cultural references will follow in due course, as the full impact of rising unemployment hits home. But a couple of other explanations occur to me. One is that however frightening redundancy is today, the modern labour market has changed beyond recognition in the last 25 years. Unemployment induced such despair in the 1980s because it affected millions of men (and it was mainly men) in traditional manufacturing industries who had assumed they were in jobs for life and saw no realistic alternative once those jobs disappeared. These days, there can be few people labouring (pardon the pun) under such illusions. Redundancy is still a nasty shock, but not necessarily a cause of despair.
It also occurs to me that some of the generation which grew up watching such TV programmes and listening to those records are now in senior enough positions to affect decisions about redundancy. They may be more inclined to look at freezing or cutting pay, or introducing part-time working as "least worst" alternatives to cutting jobs. Measures like these offer cold comfort to struggling families, of course. But it would be reassuring to think that the lasting impact of the work of Bleasdale and his contemporaries may have played some role in softening the impact of unemployment on today's workers.
AF
For those of us old enough to remember the 1980's, when unemployment was well over 3 million, one of the striking differences between then and now is the relative scarcity of cultural references to the jobless. Where is today's television equivalent of Alan Bleasdale's Boys_from_the_Blackstuff? Who is recording the noughties versions of The Specials' Ghost Town or UB40's One in Ten? (Admittedly "One in Twelve point Eight" doesn't scan well, but you get my drift.)
Perhaps the cultural references will follow in due course, as the full impact of rising unemployment hits home. But a couple of other explanations occur to me. One is that however frightening redundancy is today, the modern labour market has changed beyond recognition in the last 25 years. Unemployment induced such despair in the 1980s because it affected millions of men (and it was mainly men) in traditional manufacturing industries who had assumed they were in jobs for life and saw no realistic alternative once those jobs disappeared. These days, there can be few people labouring (pardon the pun) under such illusions. Redundancy is still a nasty shock, but not necessarily a cause of despair.
It also occurs to me that some of the generation which grew up watching such TV programmes and listening to those records are now in senior enough positions to affect decisions about redundancy. They may be more inclined to look at freezing or cutting pay, or introducing part-time working as "least worst" alternatives to cutting jobs. Measures like these offer cold comfort to struggling families, of course. But it would be reassuring to think that the lasting impact of the work of Bleasdale and his contemporaries may have played some role in softening the impact of unemployment on today's workers.
AF
Thursday, July 23, 2009
Explaining pensions in 140 characters or less
Social networking site Twitter has yet another fan, this time in the form of Dawid Konotey-Ahulu, the founder of pensions adviser Redington. Konotey-Ahulu has urged the pensions industry to start using social media to share ideas. In an article called Telling It Like It Is; The New Reality, posted online today by Financial News, Konotey-Ahulu says the lack of blogs from pension fund officials and investment consultants is a 'crying shame'.
Konotey-Ahulu writes: "It strikes me that there are hundreds of participants in the pensions and insurance industry who could benefit from using social media platforms...I hear so much wisdom from that “crowd” on my travels and very little of it makes its way onto the stage."
However he admits that the Twitter interface, requiring updates to be confined to 140 characters put him off at first. It's a common complaint, but something that Konotey-Ahulu has since come to embrace as it requires 'Tweeters' to distil their complex ideas into easy-to-understand bite-size chunks. In his own words...
"There are thousands of ordinary individuals out there who, between them, sift through thousands of articles, have myriad conversations with other people, and assimilate acres of information. Then they choose the best of the lot. They pore over information, distill the very best (in their own view, admittedly) and then serve it up for you on the plate that is Twitter.
"If you happen to follow those individuals, you have access to their condensed and distilled wisdom. In other words, Twitter aggregates relevant, useful information for you on just about every topic - around the clock. The crucial difference between Twitter and Google, is that Twitter is unnervingly real time, in a very different way to a search engine. They’re calling Twitter the super fresh web."
Self-styled "Pensionsguru", Steve Bee, is similarly enthusiastic. The fact that his Twitter moniker was still available to him, despite his relatively late entry to the world of Twitter, is, he points out, instructive – it seems the pensions industry is somewhat behind the curve in embracing new forms of communication. But with the next generation of pension savers learning about personal finance through the national curriculum, and highly literate in social media, he argues, "our future legislators and civil servants will come into the workforce trained up on Twitter, too. That could bring enormous advantages with it to our future pension legislation."
The rate with which defined benefit pension schemes are being closed appears to have escalated from a drip-drip to a gushing torrent in recent weeks. It seems that firms are taking advantage of the announcements made by their peers to wheel out their own reforms. This pushes the design of defined contribution plans to the fore. If we are to avoid another pensions crisis we need to wake employees up to the fact that the responsibility for a comfortable retirement is now up to them. We need fresh ideas, and perhaps Konotey-Ahulu is right to point to social media as the best forum for sharing these.
Can you recommend any pension-focused social media sites? Let Penrose know at: lisah@penrose.co.uk
LH
Konotey-Ahulu writes: "It strikes me that there are hundreds of participants in the pensions and insurance industry who could benefit from using social media platforms...I hear so much wisdom from that “crowd” on my travels and very little of it makes its way onto the stage."
However he admits that the Twitter interface, requiring updates to be confined to 140 characters put him off at first. It's a common complaint, but something that Konotey-Ahulu has since come to embrace as it requires 'Tweeters' to distil their complex ideas into easy-to-understand bite-size chunks. In his own words...
"There are thousands of ordinary individuals out there who, between them, sift through thousands of articles, have myriad conversations with other people, and assimilate acres of information. Then they choose the best of the lot. They pore over information, distill the very best (in their own view, admittedly) and then serve it up for you on the plate that is Twitter.
"If you happen to follow those individuals, you have access to their condensed and distilled wisdom. In other words, Twitter aggregates relevant, useful information for you on just about every topic - around the clock. The crucial difference between Twitter and Google, is that Twitter is unnervingly real time, in a very different way to a search engine. They’re calling Twitter the super fresh web."
Self-styled "Pensionsguru", Steve Bee, is similarly enthusiastic. The fact that his Twitter moniker was still available to him, despite his relatively late entry to the world of Twitter, is, he points out, instructive – it seems the pensions industry is somewhat behind the curve in embracing new forms of communication. But with the next generation of pension savers learning about personal finance through the national curriculum, and highly literate in social media, he argues, "our future legislators and civil servants will come into the workforce trained up on Twitter, too. That could bring enormous advantages with it to our future pension legislation."
The rate with which defined benefit pension schemes are being closed appears to have escalated from a drip-drip to a gushing torrent in recent weeks. It seems that firms are taking advantage of the announcements made by their peers to wheel out their own reforms. This pushes the design of defined contribution plans to the fore. If we are to avoid another pensions crisis we need to wake employees up to the fact that the responsibility for a comfortable retirement is now up to them. We need fresh ideas, and perhaps Konotey-Ahulu is right to point to social media as the best forum for sharing these.
Can you recommend any pension-focused social media sites? Let Penrose know at: lisah@penrose.co.uk
LH
Friday, July 17, 2009
Myners Retort
Hedge funds have had a tough year so far but things could get far worse if the EU draft directive on alternative investment strategies gets underway. Most European based hedge funds houses' funds are offshore, with many domiciled in the Cayman islands. The directive does not permit these funds to be sold to EU investors, a development which would be massively detrimental to the hedge fund business model and could mean the closure of masses of hedge funds. With 72% of European hedge funds and fund of funds based in London it looks like the UK asset management industry has the most to lose if the directive is implemented.
But has the EU considered the effect this would have on the underlying investors? Perhaps not but City minister Lord Myners certainly has, as this week's press reports reveal. Myners has urged investors to protest again the directive – he says the directive would "reduce choice" by preventing investors from investing in alternative investment funds run by non-EU managers. More than 70% of hedge funds and 2% of private equity funds are managed outside the EU.
The National Association of Pension Finds and European Federation for Retirement Provision have supported Myners' concerns. Lindsay Tomlinson, the incoming chairman of the NAPF, said: "There have been few EU directives that look worrying, but one could understand what they were seeking to achieve and it was possible to focus on particular clauses and seek to make them work better for investors. This does not seem to be the case with the alternative investment fund managers directive, which if implemented as drafted, would have many consequences that in aggregate do not seem to benefit investors."
Myers has revealed that the UK is working on proposals to iron out "deficiencies " in the EU directive and has confirmed that the Treasury has established seven working groups comprising Treasury officials and industry experts, to retool the proposed rules.
What is clear is that a lot of work needs to be done in achieving a united consensus on this directive – watch this space.
NB
But has the EU considered the effect this would have on the underlying investors? Perhaps not but City minister Lord Myners certainly has, as this week's press reports reveal. Myners has urged investors to protest again the directive – he says the directive would "reduce choice" by preventing investors from investing in alternative investment funds run by non-EU managers. More than 70% of hedge funds and 2% of private equity funds are managed outside the EU.
The National Association of Pension Finds and European Federation for Retirement Provision have supported Myners' concerns. Lindsay Tomlinson, the incoming chairman of the NAPF, said: "There have been few EU directives that look worrying, but one could understand what they were seeking to achieve and it was possible to focus on particular clauses and seek to make them work better for investors. This does not seem to be the case with the alternative investment fund managers directive, which if implemented as drafted, would have many consequences that in aggregate do not seem to benefit investors."
Myers has revealed that the UK is working on proposals to iron out "deficiencies " in the EU directive and has confirmed that the Treasury has established seven working groups comprising Treasury officials and industry experts, to retool the proposed rules.
What is clear is that a lot of work needs to be done in achieving a united consensus on this directive – watch this space.
NB
Lord of the Flies… 39 steps to enlightenment…?
Commentators argue in today's papers that the situation in financial markets is the result of the lack of an effective governance framework. The current environment puts Penrose in mind of the William Golding novel, Lord of the Flies and its message that a lack of rules can lead to mayhem and disaster. This analogy leads us to Sir David Walker's report on financial sector corporate governance, released yesterday, which has prompted a savage response from the banking community.
Closer scrutiny of remuneration was always going to be a key feature of the report, but some argue that the recommendations surrounding remuneration merely pander to populist outrage about bankers and their bonuses. Commenting in today's FT, the chief executive of one investment bank said Sir David had caved into populist demands: 'What purpose does this actually serve… it is fundamentally wrong to whip up this hatred of bankers?'
Sir David states that remuneration committees should worry less about whether levels of pay are too high in absolute terms, but rather whether employees are encouraged by bonus schemes to take actions that are not aligned to the long-term interests of shareholders. On the risk monitoring front, Sir David wants bank boards to set up a committee (separate from the audit committee) chaired by a non-executive director, to ensure that boards do not run amok. However one banker in today's FT argues that this will not be effective: 'Risks should be managed by non-executives hour to hour, not by non-executives month to month,' he said. The British Bankers Association, the Association of British Insurers and the Institute of Directors welcomed the vast majority of Sir David's recommendations, although the IMA said the regulator should not get involved in deciding the best way to manage money.
Arguably the main aim of Sir David's report is to change the culture of governance rather than the rules; he summed it up as an attempt to make the board 'a less cosy, comfortable place'. Indeed if these proposals eventually come into force it has been suggested that the UK is destined to have the toughest standards in the world…
EV
Closer scrutiny of remuneration was always going to be a key feature of the report, but some argue that the recommendations surrounding remuneration merely pander to populist outrage about bankers and their bonuses. Commenting in today's FT, the chief executive of one investment bank said Sir David had caved into populist demands: 'What purpose does this actually serve… it is fundamentally wrong to whip up this hatred of bankers?'
Sir David states that remuneration committees should worry less about whether levels of pay are too high in absolute terms, but rather whether employees are encouraged by bonus schemes to take actions that are not aligned to the long-term interests of shareholders. On the risk monitoring front, Sir David wants bank boards to set up a committee (separate from the audit committee) chaired by a non-executive director, to ensure that boards do not run amok. However one banker in today's FT argues that this will not be effective: 'Risks should be managed by non-executives hour to hour, not by non-executives month to month,' he said. The British Bankers Association, the Association of British Insurers and the Institute of Directors welcomed the vast majority of Sir David's recommendations, although the IMA said the regulator should not get involved in deciding the best way to manage money.
Arguably the main aim of Sir David's report is to change the culture of governance rather than the rules; he summed it up as an attempt to make the board 'a less cosy, comfortable place'. Indeed if these proposals eventually come into force it has been suggested that the UK is destined to have the toughest standards in the world…
EV
Thursday, July 16, 2009
Parental home is where the heart is - for 40% of young adults
Yesterday's unemployment figures made grim reading, especially for young adults, one in five of whom are looking for jobs. A recent survey revealed a growing generation of "little SHIDs" ('Still at Home and In Debt'), with as many as 40% of 18-35 year olds either still living with their parents, or considering moving back home as a result of debt.
But is this surprising? With the increase in competition for graduate jobs, the pressure to keep up with mortgage and rental payments, the burden of debt repayment, coupled with a nagging feeling that they should be saving for the future, no wonder many young adults are finding themselves in this predicament.
The Government recently revealed that it is considering dropping tuition fees for students who stay at home to study, in return for waiving their rights to grants and loans. While this is presumably supposed to address the issue of increasing debt, one can't help but think that by shifting the financial responsibility to the parents of these university students, the next generation is not going to learn how to adequately plan for their future. Education is key, and both Government and the financial services industry have a responsibility to help people understand the importance of providing for the future.
ELS
But is this surprising? With the increase in competition for graduate jobs, the pressure to keep up with mortgage and rental payments, the burden of debt repayment, coupled with a nagging feeling that they should be saving for the future, no wonder many young adults are finding themselves in this predicament.
The Government recently revealed that it is considering dropping tuition fees for students who stay at home to study, in return for waiving their rights to grants and loans. While this is presumably supposed to address the issue of increasing debt, one can't help but think that by shifting the financial responsibility to the parents of these university students, the next generation is not going to learn how to adequately plan for their future. Education is key, and both Government and the financial services industry have a responsibility to help people understand the importance of providing for the future.
ELS
Super-Calpers-go-ballistic-Ratings-are-atrocious
Who rates the raters? Perhaps the state of California if Calpers has anything to do with proceedings. The largest public pension scheme in the US is suing the big three credit rating agencies for awarding AAA grades to securities that suffered enormous subprime losses. Suffice to say, given the size and power of the scheme – it manages a massive $173 billion of pensions after all – when Calpers sneezes, the world pays attention.
The suit filed against Moody's, Fitch and Standard & Poor's at the Superior Court in San Francisco, could be a watershed moment. The raters, although bloodied and their reputation in tatters, have at least managed to prevail against similar legal challenges before. However, they may meet their match squaring up against the pension giant famous for its shareholder activism.
The Calpers lawsuit alleges that "wildly inaccurate" Triple-A ratings of structured investment vehicles (SIVs) contributed to losses of over $1 billion. Nothing particularly new here, but what's interesting is their allegation that the rating agencies not only rated the SIVs, but also the securities that the vehicles purchased, to the extent that they provided guidance to the banks on what they needed to do to obtain the crucial AAA ratings. Here lies the rub, as Calpers' objection goes to the heart of the debate around the shadowy relationship between the financial engineers and those who rate their products.
Conflicts of interest is a phrase never far from the table as Calpers contends the SIV rating fees, which it says range from $300,000 to $1 million per deal, were reliant upon the successful sale of SIV securities. It doesn't take Columbo to read the subtext suggesting that there were arguably one million different reasons why the agencies would do everything in their power to ensure SIVs got top ratings. Dwight Cass of breakingviews adds an important note: "If they assisted in structuring the SIVs, that undermines the raters' assertion that their ratings constitute opinions worthy of the same First Amendment protections afforded journalists." Fitch's then-general counsel told lawmakers investigating the Enron debacle that a rating was 'the world's shortest editorial'. That pretence doesn't hold up when you're commenting on something you designed yourself."
The case highlights just how reliant investors are upon ratings agencies for their investment decisions, even highly sophisticated ones like Calpers. Worryingly, Calpers also claim that they didn't receive enough information from the SIVs or the raters to adequately understand the vehicles. Well, surely if you don't understand a product then you shouldn't really invest in it? Caveat emptor anyone? That said, Triple-A ratings are supposed to be as safe as houses – sorry, poor choice of words given subprime.
Ultimately, the entire financial services industry must take its share of the blame for the situation we find ourselves in – from asset managers, investors, and banks right through to the risk profession itself. The ratings agencies are easy scapegoats (incredibly easy, I'll give you that) and whilst concerns about their operation and conflicts of interest might be quite correct, it was not they alone that failed to spot the looming spectre of subprime. It's ironic that at a time where liquidity is in such short supply (unless you're Goldman Sachs of course), everyone has been so quick to pass the buck.
JS
The suit filed against Moody's, Fitch and Standard & Poor's at the Superior Court in San Francisco, could be a watershed moment. The raters, although bloodied and their reputation in tatters, have at least managed to prevail against similar legal challenges before. However, they may meet their match squaring up against the pension giant famous for its shareholder activism.
The Calpers lawsuit alleges that "wildly inaccurate" Triple-A ratings of structured investment vehicles (SIVs) contributed to losses of over $1 billion. Nothing particularly new here, but what's interesting is their allegation that the rating agencies not only rated the SIVs, but also the securities that the vehicles purchased, to the extent that they provided guidance to the banks on what they needed to do to obtain the crucial AAA ratings. Here lies the rub, as Calpers' objection goes to the heart of the debate around the shadowy relationship between the financial engineers and those who rate their products.
Conflicts of interest is a phrase never far from the table as Calpers contends the SIV rating fees, which it says range from $300,000 to $1 million per deal, were reliant upon the successful sale of SIV securities. It doesn't take Columbo to read the subtext suggesting that there were arguably one million different reasons why the agencies would do everything in their power to ensure SIVs got top ratings. Dwight Cass of breakingviews adds an important note: "If they assisted in structuring the SIVs, that undermines the raters' assertion that their ratings constitute opinions worthy of the same First Amendment protections afforded journalists." Fitch's then-general counsel told lawmakers investigating the Enron debacle that a rating was 'the world's shortest editorial'. That pretence doesn't hold up when you're commenting on something you designed yourself."
The case highlights just how reliant investors are upon ratings agencies for their investment decisions, even highly sophisticated ones like Calpers. Worryingly, Calpers also claim that they didn't receive enough information from the SIVs or the raters to adequately understand the vehicles. Well, surely if you don't understand a product then you shouldn't really invest in it? Caveat emptor anyone? That said, Triple-A ratings are supposed to be as safe as houses – sorry, poor choice of words given subprime.
Ultimately, the entire financial services industry must take its share of the blame for the situation we find ourselves in – from asset managers, investors, and banks right through to the risk profession itself. The ratings agencies are easy scapegoats (incredibly easy, I'll give you that) and whilst concerns about their operation and conflicts of interest might be quite correct, it was not they alone that failed to spot the looming spectre of subprime. It's ironic that at a time where liquidity is in such short supply (unless you're Goldman Sachs of course), everyone has been so quick to pass the buck.
JS
Wednesday, July 15, 2009
Eeeh. Quality.
Harriet Harman's latest initiative to outlaw discrimination against northerners is timely. Not because its' a good idea (it isn't), but because in these difficult times it brings some much-needed hilarity to national political debate.
I always assumed the Arts Council's failure to appoint me Chairman (sorry, Chairperson) was due to some kind of administrative oversight, so it tickles me to discover that it could actually all be down to the fact that I'm from Sheffield.
Equally cheering is this news, reported by the excellent Daily Mash. At last, some long overdue recognition for we downtrodden millions from north of the Trent.
Whatever else you may think of Ms Harman, you've got to admit she's doing her bit to put a smile back on the face of Britain.
AF
I always assumed the Arts Council's failure to appoint me Chairman (sorry, Chairperson) was due to some kind of administrative oversight, so it tickles me to discover that it could actually all be down to the fact that I'm from Sheffield.
Equally cheering is this news, reported by the excellent Daily Mash. At last, some long overdue recognition for we downtrodden millions from north of the Trent.
Whatever else you may think of Ms Harman, you've got to admit she's doing her bit to put a smile back on the face of Britain.
AF
Pensions: Innovate or die
Following yesterday's RSA Insurance Group deal with Goldman Sachs, it is evident that the pensions buyout market is back. Gone are the lacklustre days in which pension schemes shrank from the high costs associated with such deals: clearly there is money to be made by pensions buyout giants, such as Rothesay Life and Paternoster, and appetite from schemes as well. As Paul Trickett of Watson Wyatt said in today's FT: now that a few large funds have made the move, others are sure to follow.
As non-stop national press coverage makes clear, widening funding deficits, rising costs and increasing longevity make final salary pensions look more and more unsustainable. With an ever increasing number of DB scheme closures, it is clear that employers will do anything to get those pesky pensions liabilities off their balance sheets once and for all. Usually something has to give in such an arrangement: trustees and members are sacrificed for the greater good of the corporate giant. But in RSA's deal, trustees will maintain control of how the scheme's assets are invested. There is no disenfranchisement here: ownership and responsibility still rests with the trustees, while the corporate balance sheet is protected, at minimal costs. As Dow Jones points out, the reduction of the schemes' exposure to longevity, inflation and interest-rate risk and the high degree of security for the schemes are also key selling points of the deal.
Does this mean that the death of final salary pensions is not quite as near as we all had feared? Is there actually a wealth of options out there for pension schemes to pursue, perfectly designed and tailored to them? The Guardian brings us back to reality, reminding us that RSA has already closed its final salary scheme to new members and shifted current employees to a career average scheme. The pure DB pension scheme open to all members has one foot in the grave and is a thing of the past.
What insight does this deal leave us with, then? Surely it proves that in today's climate, pension schemes must innovate to survive at all, given the many economic, market and demographic woes it has to grapple with. RSA was smart enough to realise it needed something tailor-made to suit them—a simple buyout would not be sufficient. Many luminaries have cautioned that only the best fund managers will survive this crisis, citing Darwin's well-known thesis. Perhaps this should be extended to pension schemes as well—only those willing to innovate and re-invent themselves will endure.
CMM
As non-stop national press coverage makes clear, widening funding deficits, rising costs and increasing longevity make final salary pensions look more and more unsustainable. With an ever increasing number of DB scheme closures, it is clear that employers will do anything to get those pesky pensions liabilities off their balance sheets once and for all. Usually something has to give in such an arrangement: trustees and members are sacrificed for the greater good of the corporate giant. But in RSA's deal, trustees will maintain control of how the scheme's assets are invested. There is no disenfranchisement here: ownership and responsibility still rests with the trustees, while the corporate balance sheet is protected, at minimal costs. As Dow Jones points out, the reduction of the schemes' exposure to longevity, inflation and interest-rate risk and the high degree of security for the schemes are also key selling points of the deal.
Does this mean that the death of final salary pensions is not quite as near as we all had feared? Is there actually a wealth of options out there for pension schemes to pursue, perfectly designed and tailored to them? The Guardian brings us back to reality, reminding us that RSA has already closed its final salary scheme to new members and shifted current employees to a career average scheme. The pure DB pension scheme open to all members has one foot in the grave and is a thing of the past.
What insight does this deal leave us with, then? Surely it proves that in today's climate, pension schemes must innovate to survive at all, given the many economic, market and demographic woes it has to grapple with. RSA was smart enough to realise it needed something tailor-made to suit them—a simple buyout would not be sufficient. Many luminaries have cautioned that only the best fund managers will survive this crisis, citing Darwin's well-known thesis. Perhaps this should be extended to pension schemes as well—only those willing to innovate and re-invent themselves will endure.
CMM
Wednesday, July 8, 2009
The Ironic Chancellor
Alistair Darling sets out the Government's latest ideas on bank regulation today, so will no doubt be all over the media for the next few hours.
The Chancellor always gives the impression of being a rather reluctant media figure. The furore around his interview with the Guardian last August probably didn't help. In a wide-ranging profile by Decca Aitkenhead, Mr Darling described the economic times as the worst for 60 years, attracting a barrage of criticism. But he turned out to be pretty much on the mark.
As an editorial in the same paper a couple of days later pointed out, the full Aitkenhead interview gave an insight into "a politician of unusual integrity, dry humour, and sober intelligence". Having worked with Mr Darling when he was Secretary of State for Social Security, I can only endorse that view. And whenever I speak to colleagues from that time, we all seem to agree that we find ourselves defending the Chancellor in similar terms whenever his name crops up amidst the current crisis. He is, we generally agree, a "top bloke".
So it was interesting to read these comments in Sunday's Observer from Matthew D'Ancona – not, one would have thought, instinctively a fan.
AF
The Chancellor always gives the impression of being a rather reluctant media figure. The furore around his interview with the Guardian last August probably didn't help. In a wide-ranging profile by Decca Aitkenhead, Mr Darling described the economic times as the worst for 60 years, attracting a barrage of criticism. But he turned out to be pretty much on the mark.
As an editorial in the same paper a couple of days later pointed out, the full Aitkenhead interview gave an insight into "a politician of unusual integrity, dry humour, and sober intelligence". Having worked with Mr Darling when he was Secretary of State for Social Security, I can only endorse that view. And whenever I speak to colleagues from that time, we all seem to agree that we find ourselves defending the Chancellor in similar terms whenever his name crops up amidst the current crisis. He is, we generally agree, a "top bloke".
So it was interesting to read these comments in Sunday's Observer from Matthew D'Ancona – not, one would have thought, instinctively a fan.
AF
Neither a borrower nor lender be?
With the first day of the Ashes upon us, perhaps it's appropriate to begin with a cricketing analogy: the capital markets are like England fast-bowler Steve Harmison. No I don't mean that they're a lanky, Durham cricketer who continually fails to live up to his potential, but rather in the sense that they feed off confidence. With it, they both fly; without it, nothing functions properly. Investors, governments, corporates, regulators and all the other assortment of bodies that make up the financial market, are ultimately at the whim of something completely intangible – sentiment.
For people that spend most of their lives thinking in acronyms – NAV, LIBOR, EBITA, AUM – capital market participants can behave just like the rest of us and follow the herd rather than logic. For reasons that require no explanation, these players have generally been crestfallen, sometimes suicidal or simply lacking confidence for quite some time now. With that in mind, perhaps the rain that stopped play of late has abated, and everyone is ready to take the field again. Well, this would certainly be the impression if we look at the thorny subject of securitisation. There have been a number of editorial pieces this week suggesting that this art is showing signs of life.
How things change – just a few months ago for any banker to put his head above the parapet and proclaim the case for securitisation would have been castigated, such was the climate of hostility against the practise. Now we have both Goldman Sachs and Barclays Capital in the Financial Times discussing their new structural innovations – dubbed "insurance" and "smarter securitisation" respectively. However, it's important not to get ahead of ourselves, ultimately the markets for securitised loans are still very much frozen. That said, the "rocket scientists" who designed these complex instruments have not just been twiddling their thumbs. Financial engineering is alive.
The freeze in the securitisation markets has caused a dramatic shortage of lending power – $8,700bn of assets are currently funded by securitisation after all. Banks cannot possibly plug this gap with traditional lending, such is the regulatory pressure they're under to improve capital ratios. Some have suggested that this might be an opportune moment to bring back the bundling of loans into tradable securities. Many banks are petrified about lending, or constrained by their government owners and overseers to de-leverage their balance sheets. As George Hay of breakingviews explains: "If strong institutions can be found to take on the unwanted loans, everyone could be better off."
Despite the attempts to kick-start the securitisation markets, it doesn't look like we'll see a return of the incredibly complicated CDO squareds, CDO cubeds and the like anytime soon. These structures have been so discredited and investors so wary of them that they've become persona non grata. Even during the worst of the financial crisis, equities were always traded – unlike the highly complicated structured products which people wouldn't touch with a barge-pole. The CDO or CLO market dried up, even if they were fairly 'sound' – as market confidence dissipated, they simply became untradeable.
As the wheels of securitisation slowly start to move, regulators should (and will) keep a watchful eye on the process. Securitisation should theoretically help keep the financial system balanced by making it easier for banks to manage their balance sheets. However, in practise it became a tool for banks to hide leverage, moving the securitised loans off their balance sheets and into those infamous structured investment vehicles.
Risk and regulation are aspects of the new financial order that nobody can deny. It's become a matter of political expediency as well as economic necessity. Although not every attempt to regulate will pass through, I think we all know that financial institutions are going to face more regulation and supervision rather than less. Investors will also demand far more transparency. While it was okay to push on without question while the going was good and returns delivered, the world is just not like that anymore.
The interest of parties must be more closely aligned and this is why the European Commission is demanding that rating agencies and bankers disclose more information about deals. As the FT reports, banks may well face calls to keep 5 per cent of any securitised bonds that they arrange, so they have enough "skin in the game" to monitor credit risks properly. The direct link between borrowers and lenders must be preserved if this market is to stand any chance of real recovery. Accountability, transparency and good governance are going to be bywords going forward.
The Guardian's Elena Moya contends that Goldman Sachs's and BarCap's securitisation initiatives represent a "sign that the City is returning to pre-credit crunch levels of confidence." That may well be overstating the case, as the market is still far from out of the woods, but it's telling that a practise so criticised for triggering the financial crisis is taking a few tentative steps into the open. Perhaps the rain has stopped and the players are now looking to take guard. They'll need to play with a straight bat though.
JS
For people that spend most of their lives thinking in acronyms – NAV, LIBOR, EBITA, AUM – capital market participants can behave just like the rest of us and follow the herd rather than logic. For reasons that require no explanation, these players have generally been crestfallen, sometimes suicidal or simply lacking confidence for quite some time now. With that in mind, perhaps the rain that stopped play of late has abated, and everyone is ready to take the field again. Well, this would certainly be the impression if we look at the thorny subject of securitisation. There have been a number of editorial pieces this week suggesting that this art is showing signs of life.
How things change – just a few months ago for any banker to put his head above the parapet and proclaim the case for securitisation would have been castigated, such was the climate of hostility against the practise. Now we have both Goldman Sachs and Barclays Capital in the Financial Times discussing their new structural innovations – dubbed "insurance" and "smarter securitisation" respectively. However, it's important not to get ahead of ourselves, ultimately the markets for securitised loans are still very much frozen. That said, the "rocket scientists" who designed these complex instruments have not just been twiddling their thumbs. Financial engineering is alive.
The freeze in the securitisation markets has caused a dramatic shortage of lending power – $8,700bn of assets are currently funded by securitisation after all. Banks cannot possibly plug this gap with traditional lending, such is the regulatory pressure they're under to improve capital ratios. Some have suggested that this might be an opportune moment to bring back the bundling of loans into tradable securities. Many banks are petrified about lending, or constrained by their government owners and overseers to de-leverage their balance sheets. As George Hay of breakingviews explains: "If strong institutions can be found to take on the unwanted loans, everyone could be better off."
Despite the attempts to kick-start the securitisation markets, it doesn't look like we'll see a return of the incredibly complicated CDO squareds, CDO cubeds and the like anytime soon. These structures have been so discredited and investors so wary of them that they've become persona non grata. Even during the worst of the financial crisis, equities were always traded – unlike the highly complicated structured products which people wouldn't touch with a barge-pole. The CDO or CLO market dried up, even if they were fairly 'sound' – as market confidence dissipated, they simply became untradeable.
As the wheels of securitisation slowly start to move, regulators should (and will) keep a watchful eye on the process. Securitisation should theoretically help keep the financial system balanced by making it easier for banks to manage their balance sheets. However, in practise it became a tool for banks to hide leverage, moving the securitised loans off their balance sheets and into those infamous structured investment vehicles.
Risk and regulation are aspects of the new financial order that nobody can deny. It's become a matter of political expediency as well as economic necessity. Although not every attempt to regulate will pass through, I think we all know that financial institutions are going to face more regulation and supervision rather than less. Investors will also demand far more transparency. While it was okay to push on without question while the going was good and returns delivered, the world is just not like that anymore.
The interest of parties must be more closely aligned and this is why the European Commission is demanding that rating agencies and bankers disclose more information about deals. As the FT reports, banks may well face calls to keep 5 per cent of any securitised bonds that they arrange, so they have enough "skin in the game" to monitor credit risks properly. The direct link between borrowers and lenders must be preserved if this market is to stand any chance of real recovery. Accountability, transparency and good governance are going to be bywords going forward.
The Guardian's Elena Moya contends that Goldman Sachs's and BarCap's securitisation initiatives represent a "sign that the City is returning to pre-credit crunch levels of confidence." That may well be overstating the case, as the market is still far from out of the woods, but it's telling that a practise so criticised for triggering the financial crisis is taking a few tentative steps into the open. Perhaps the rain has stopped and the players are now looking to take guard. They'll need to play with a straight bat though.
JS
Wednesday, July 1, 2009
Crime of the century (and a half)
I have been somewhat shocked by the recent Madoff ruling on two fronts. Firstly, according to some sources the average incarceration for murder convictions in the US is around 22 years. Are we saying that Madoff's behaviour is seven times as evil? And secondly, does the US really need to pass ridiculously long sentences that don't even reflect reality (do many 71 year old men live another 150 years?......Yes quite).
By no means am I saying that Madoff doesn't deserve to be punished for his crimes. He has ruined the lives of many people who had faith in his investment strategies and who had trusted him with their life savings. But to put him in the same or worse bracket as a murderer is disproportionate to his crime.
The US courts are fond of handing out harsh sentences and Madoff's sentence is not the longest for a white collar criminal. This was awarded to Sholam_Weiss who was sentenced in Feb 2000 to 845 years in prison for his plot to defraud an insurance company costing many of its 25,000 customers their life savings. Does that not seem a little extreme? Clearly there is no chance in hell these men will get out of jail alive. It's one thing to advocate life to mean life for murder sentences, but shouldn't the same apply for financial crimes?
LL
By no means am I saying that Madoff doesn't deserve to be punished for his crimes. He has ruined the lives of many people who had faith in his investment strategies and who had trusted him with their life savings. But to put him in the same or worse bracket as a murderer is disproportionate to his crime.
The US courts are fond of handing out harsh sentences and Madoff's sentence is not the longest for a white collar criminal. This was awarded to Sholam_Weiss who was sentenced in Feb 2000 to 845 years in prison for his plot to defraud an insurance company costing many of its 25,000 customers their life savings. Does that not seem a little extreme? Clearly there is no chance in hell these men will get out of jail alive. It's one thing to advocate life to mean life for murder sentences, but shouldn't the same apply for financial crimes?
LL
Thursday, June 25, 2009
Investors' hopes for retailer therapy
Following on from our last blog update about public sector pensions, today's papers make much of the latest controversy around MPs' pensions. Frankly, even I'm struggling to come up with a defence for providing such a generous scheme at the taxpayers' expense, and Ros Altmann explains more eloquently than I why MPs' pension arrangements elicit such rancour.
One area in which pension funds, and other investors, are likely to assume a higher profile in the coming days is over the trouble brewing at Marks & Spencer, ahead of the company's AGM in a couple of weeks' time. As Richard Fletcher points out in today's Telegraph the M&S boardroom has resembled a soap opera in recent times. The latest cliffhanger surrounds growing shareholder pressure on Sir Stuart Rose to relinquish his executive chairmanship, which runs counter to best practice as set out in the Combined Code on corporate governance. According to corporate governance advisers PIRC, Sir Stuart's role is "a significant breach" of the Code, which seeks to guide companies on how best to run themselves in accordance with principles agreed by shareholders and directors, and which advocates the separation of roles of Chairman and Chief Executive, mainly to avoid the concentration of power in one pair of hands.
The Financial Reporting Council is currently consulting on potential changes to the code, and among the long list of names who have responded to the consultation is a certain leading High Street retailer. Among other points raised in Marks & Spencer's response is the suggestion that it would be "helpful to differentiate between the roles of chairman and chief executive being combined and the chief executive stepping up to be chairman". A point which corporate governance advisers such as PIRC would presumably endorse.
AF
One area in which pension funds, and other investors, are likely to assume a higher profile in the coming days is over the trouble brewing at Marks & Spencer, ahead of the company's AGM in a couple of weeks' time. As Richard Fletcher points out in today's Telegraph the M&S boardroom has resembled a soap opera in recent times. The latest cliffhanger surrounds growing shareholder pressure on Sir Stuart Rose to relinquish his executive chairmanship, which runs counter to best practice as set out in the Combined Code on corporate governance. According to corporate governance advisers PIRC, Sir Stuart's role is "a significant breach" of the Code, which seeks to guide companies on how best to run themselves in accordance with principles agreed by shareholders and directors, and which advocates the separation of roles of Chairman and Chief Executive, mainly to avoid the concentration of power in one pair of hands.
The Financial Reporting Council is currently consulting on potential changes to the code, and among the long list of names who have responded to the consultation is a certain leading High Street retailer. Among other points raised in Marks & Spencer's response is the suggestion that it would be "helpful to differentiate between the roles of chairman and chief executive being combined and the chief executive stepping up to be chairman". A point which corporate governance advisers such as PIRC would presumably endorse.
AF
Thursday, June 4, 2009
Public sector pensions
4 June 2009
Changes to Defined Benefit pension schemes run by BP and Barclays have hit the headlines this week. They're widely acknowledged to be setting the trend for further announcements in the coming weeks by other blue chip employers faced with similarly daunting pension liabilities.
One side-effect of these announcements is likely to be renewed media interest in the sustainability of DB pensions in the public sector. As one City editor writes today, "this week's actions by Barclays and BP emphasise the need for the next government – in the interests of fairness – to confront the huge taxpayer cost of public sector pensions."
If I had a pound for every time the press used the term "gold-plated" in relation to public sector pensions, I could probably retire tomorrow.
Tragically, I've been unable to negotiate such an arrangement. Twelve years of working for various government departments in the 1980s and '90s, however, mean I am a deferred member of the civil service pension scheme. This means that in 2024, taxpayers (including millions of public sector workers) will have to pay me a lump sum of about £12,000, and then about £4,000 a year until my death (which, on these figures, is more likely to be caused by hypothermia than choking on fois gras). These may or may not be typical numbers, but certainly very few people will be taking Goodwinian sums from public sector pension schemes.
So, in anticipation of the wave of opprobrium about to descend on my fellow public sector pension scheme members, I'd urge you to consider this thought provoking analysis. And to bear in mind that a critical proportion of the electorate are either active or deferred members of public sector schemes.
AF
Changes to Defined Benefit pension schemes run by BP and Barclays have hit the headlines this week. They're widely acknowledged to be setting the trend for further announcements in the coming weeks by other blue chip employers faced with similarly daunting pension liabilities.
One side-effect of these announcements is likely to be renewed media interest in the sustainability of DB pensions in the public sector. As one City editor writes today, "this week's actions by Barclays and BP emphasise the need for the next government – in the interests of fairness – to confront the huge taxpayer cost of public sector pensions."
If I had a pound for every time the press used the term "gold-plated" in relation to public sector pensions, I could probably retire tomorrow.
Tragically, I've been unable to negotiate such an arrangement. Twelve years of working for various government departments in the 1980s and '90s, however, mean I am a deferred member of the civil service pension scheme. This means that in 2024, taxpayers (including millions of public sector workers) will have to pay me a lump sum of about £12,000, and then about £4,000 a year until my death (which, on these figures, is more likely to be caused by hypothermia than choking on fois gras). These may or may not be typical numbers, but certainly very few people will be taking Goodwinian sums from public sector pension schemes.
So, in anticipation of the wave of opprobrium about to descend on my fellow public sector pension scheme members, I'd urge you to consider this thought provoking analysis. And to bear in mind that a critical proportion of the electorate are either active or deferred members of public sector schemes.
AF
Friday, May 29, 2009
And the prize for "Most Blindingly Obvious Survey Results" goes to...
29 May 2009
…the Office for National Statistics (ONS), whose new report on Pension Trends reveals that "employees on low earnings are less likely to belong to pension schemes than higher-paid employees". It seems only 21% of men and 32% of women earning less than £300 a week are members of employers' pension schemes. The only surprise here is that those numbers are as high as they are.
Earlier this week, a BBC report found that half of UK adults between 20 and 60 are not saving into a pension. Again, maybe not surprising.
The numbers do, though, provide a useful indication of the importance of the new Personal Accounts system, due to be up and running in 2012. Regardless of the ongoing woes of workplace pension providers, pension deficits and demographic time bombs, it's worth remembering that Personal Accounts are probably the last chance to provide much needed additional retirement income for millions of people on middle and low incomes, and to avoid that burden falling entirely on taxpayers of the future. Who, let's face it, will have enough on their plates after recent developments in the public finances.
Tom Stevenson, writing in the Telegraph earlier this week , invoked Goethe, no less, in addressing this issue: "whatever you can do, or dream you can, begin it".
AF
…the Office for National Statistics (ONS), whose new report on Pension Trends reveals that "employees on low earnings are less likely to belong to pension schemes than higher-paid employees". It seems only 21% of men and 32% of women earning less than £300 a week are members of employers' pension schemes. The only surprise here is that those numbers are as high as they are.
Earlier this week, a BBC report found that half of UK adults between 20 and 60 are not saving into a pension. Again, maybe not surprising.
The numbers do, though, provide a useful indication of the importance of the new Personal Accounts system, due to be up and running in 2012. Regardless of the ongoing woes of workplace pension providers, pension deficits and demographic time bombs, it's worth remembering that Personal Accounts are probably the last chance to provide much needed additional retirement income for millions of people on middle and low incomes, and to avoid that burden falling entirely on taxpayers of the future. Who, let's face it, will have enough on their plates after recent developments in the public finances.
Tom Stevenson, writing in the Telegraph earlier this week , invoked Goethe, no less, in addressing this issue: "whatever you can do, or dream you can, begin it".
AF
Friday, May 22, 2009
The Times They Are Exchanging
21 May 2009
"Regrets I have a few, but then again, too few to mention,
I did what I had to do, and saw it thru' without exception,
I planned each chartered course, Each careful step along the by-way.
And more, much more than this, I did it my way."
So it's farewell to the "iron-lady" of Paternoster Square, as Dame Clare Furse yesterday stepped down as chief executive of the London Stock Exchange after eight years in the hot-seat. More Sinatra than Piaf, Dame Clara did concede that she had a few regrets. However, as always, she was resolute in her defence about fighting off the five takeover approaches during her tenure.
Never loved but always respected, financial commentators have treated the exit of "Queen Clara" with more affection than resentment. Platitudes aside, it's always been accepted that the worth of a CEO must be judged by whether they leave their company in a better state than they found it. Jeremy Warner in The Independent said that this question could be answered strongly in the affirmative.
Still, Dame Clara has left a mixed legacy and despite her vigorous refusal to sell the family silver and taking the LSE's share price to just short of £20, she exits the borse with shares trading at 689p and the institution lying sadly outside the FTSE 100. Perhaps the real black mark against her name was not snapping up Liffe, the financial futures market, back in 2001 – suffering the indignity of rival Euronext pinching it from beneath her nose and leaving the LSE without a world-class and highly lucrative derivatives operation.
Our attention now turns to Xavier Rolet, the great white hope, who takes over from Dame Clara with a strong reputation and genuine understanding of the LSE's machinations given his previous position at Lehmans – formerly the exchange's biggest client. Some have suggested that he's taking over at the perfect time, reaping the rewards if a recovery takes hold.
However, to affect such a change, a real evolution will be required. The European trading landscape has been transformed since the MiFID reforms of 2007. The market is increasingly fragmented and the traditional hegemony enjoyed by market stalwarts like the LSE is being increasingly challenged by multi-lateral trading platforms such as Chi-X and Turquoise. The LSE has also been slow to react to the threat posed by dark pools, which provide liquidity not displayed on order books, allowing traders to move large amounts of shares without revealing themselves to the market.
So Monsieur Rolet, to persist with the protracted musical motif, some advice below:
"You better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'"
JS
"Regrets I have a few, but then again, too few to mention,
I did what I had to do, and saw it thru' without exception,
I planned each chartered course, Each careful step along the by-way.
And more, much more than this, I did it my way."
So it's farewell to the "iron-lady" of Paternoster Square, as Dame Clare Furse yesterday stepped down as chief executive of the London Stock Exchange after eight years in the hot-seat. More Sinatra than Piaf, Dame Clara did concede that she had a few regrets. However, as always, she was resolute in her defence about fighting off the five takeover approaches during her tenure.
Never loved but always respected, financial commentators have treated the exit of "Queen Clara" with more affection than resentment. Platitudes aside, it's always been accepted that the worth of a CEO must be judged by whether they leave their company in a better state than they found it. Jeremy Warner in The Independent said that this question could be answered strongly in the affirmative.
Still, Dame Clara has left a mixed legacy and despite her vigorous refusal to sell the family silver and taking the LSE's share price to just short of £20, she exits the borse with shares trading at 689p and the institution lying sadly outside the FTSE 100. Perhaps the real black mark against her name was not snapping up Liffe, the financial futures market, back in 2001 – suffering the indignity of rival Euronext pinching it from beneath her nose and leaving the LSE without a world-class and highly lucrative derivatives operation.
Our attention now turns to Xavier Rolet, the great white hope, who takes over from Dame Clara with a strong reputation and genuine understanding of the LSE's machinations given his previous position at Lehmans – formerly the exchange's biggest client. Some have suggested that he's taking over at the perfect time, reaping the rewards if a recovery takes hold.
However, to affect such a change, a real evolution will be required. The European trading landscape has been transformed since the MiFID reforms of 2007. The market is increasingly fragmented and the traditional hegemony enjoyed by market stalwarts like the LSE is being increasingly challenged by multi-lateral trading platforms such as Chi-X and Turquoise. The LSE has also been slow to react to the threat posed by dark pools, which provide liquidity not displayed on order books, allowing traders to move large amounts of shares without revealing themselves to the market.
So Monsieur Rolet, to persist with the protracted musical motif, some advice below:
"You better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'"
JS
Investors Reluctant to Shell Out for Under-Performing Execs
20 May 2009
Earlier this year, there was much speculation about whether the recession would mean more active shareholder engagement with the companies they invest in. The Investment Management Association seems to think so.
And Shell executives were yesterday given an emphatic reminder of this issue, when 59% of shareholders voted against the company's remuneration policy.
Commentators have drawn parallels with a similar vote at GSK six years ago. At that time, new legislation had compelled UK listed companies to put their pay arrangements to an advisory shareholder vote for the first time. Many, it seemed, were caught unawares. Shareholders, represented by groups such as the National Association of Pension Funds, made clear their intention to hold executives to account over what were seen as excessive rewards for poor performances. The arguments set out by the then NAPF Chief Executive, Christine Farnish, will still resonate with investors in today's troubled markets.
The Shell vote suggests that the lessons of six years ago have not yet been learned. So what next? Perhaps, as Nils Pratley argues in the Guardian today, shareholder votes on remuneration issues should be made more than just "advisory"?
Earlier this year, there was much speculation about whether the recession would mean more active shareholder engagement with the companies they invest in. The Investment Management Association seems to think so.
And Shell executives were yesterday given an emphatic reminder of this issue, when 59% of shareholders voted against the company's remuneration policy.
Commentators have drawn parallels with a similar vote at GSK six years ago. At that time, new legislation had compelled UK listed companies to put their pay arrangements to an advisory shareholder vote for the first time. Many, it seemed, were caught unawares. Shareholders, represented by groups such as the National Association of Pension Funds, made clear their intention to hold executives to account over what were seen as excessive rewards for poor performances. The arguments set out by the then NAPF Chief Executive, Christine Farnish, will still resonate with investors in today's troubled markets.
The Shell vote suggests that the lessons of six years ago have not yet been learned. So what next? Perhaps, as Nils Pratley argues in the Guardian today, shareholder votes on remuneration issues should be made more than just "advisory"?
Getting the work/death balance right
7 May 2009
Yesterday's paper from the National Institute of Economic and Social research, suggesting the projected explosion in government debt could be addressed by raising the state retirement age, resulted in a flurry of predictable "Work 'Til You Drop" headlines.
To those of us who view the current retirement age of 65 as soul-crushingly distant, such headlines might induce despair. But as the BBC's Economics Editor, Stephanie Flanders, points out, "there are no good options for cutting government debt, but extending all of our working lives could be the best of a bad lot". The NIESR reckons that extending our collective working lives by just one year would reduce the national debt by 20% of GDP over 30 years. Put in those terms, raising the pension age begins to look like an increasingly attractive option for a cash-strapped Exchequer.
Hefty increases to the state pension age have already been factored into existing legislation. The pension age for women will increase from 60 to 65 over the next 10 years, and there will be a further increase for everyone, from 65 to 68, between 2023 and 2046.
Back in 2002, the former Minister for Welfare Reform, Frank Field, pointed out that if the average length of retirement when the current state pension was introduced in 1948 had been maintained, the state pension age would now be over 74. Around the same time, the then Secretary of State for Work and Pensions, one Alistair Darling, was warning that growing life expectancy was placing an intolerable strain on the pension system. It was not feasible, he pointed out, for a forty year working life to provide enough cash to sustain someone through a retirement of thirty years or more.
Mr Darling may draw some comfort from the findings of Cambridge University geneticist, Aubrey De Grey. He's perhaps at the slightly wacky end of the spectrum, but if he's right, even raising the retirement age to 100 would leave some of us enjoying 900 years of retirement. Presumably he's ploughing his savings into manufacturers of colostomy bags and walk-in showers as we speak…
Yesterday's paper from the National Institute of Economic and Social research, suggesting the projected explosion in government debt could be addressed by raising the state retirement age, resulted in a flurry of predictable "Work 'Til You Drop" headlines.
To those of us who view the current retirement age of 65 as soul-crushingly distant, such headlines might induce despair. But as the BBC's Economics Editor, Stephanie Flanders, points out, "there are no good options for cutting government debt, but extending all of our working lives could be the best of a bad lot". The NIESR reckons that extending our collective working lives by just one year would reduce the national debt by 20% of GDP over 30 years. Put in those terms, raising the pension age begins to look like an increasingly attractive option for a cash-strapped Exchequer.
Hefty increases to the state pension age have already been factored into existing legislation. The pension age for women will increase from 60 to 65 over the next 10 years, and there will be a further increase for everyone, from 65 to 68, between 2023 and 2046.
Back in 2002, the former Minister for Welfare Reform, Frank Field, pointed out that if the average length of retirement when the current state pension was introduced in 1948 had been maintained, the state pension age would now be over 74. Around the same time, the then Secretary of State for Work and Pensions, one Alistair Darling, was warning that growing life expectancy was placing an intolerable strain on the pension system. It was not feasible, he pointed out, for a forty year working life to provide enough cash to sustain someone through a retirement of thirty years or more.
Mr Darling may draw some comfort from the findings of Cambridge University geneticist, Aubrey De Grey. He's perhaps at the slightly wacky end of the spectrum, but if he's right, even raising the retirement age to 100 would leave some of us enjoying 900 years of retirement. Presumably he's ploughing his savings into manufacturers of colostomy bags and walk-in showers as we speak…
In Cod We Trust
5 May 2009
The Bank of England is, it seems, hoping to learn something from the animal kingdom and other non-financial structures about how better to run the financial sector.
Gillian Tett, in the FT this weekend, reports that Mervyn King and his colleagues have been brainstorming with Lord Robert May, eminent zoologist and former head of the Royal Society, about whether the actions of the financial services industry can be predicted or controlled in the light of what we know about animal behaviour or environmental systems.
A paper co-authored by Lord May last year suggested that risk management in the financial sector is analogous to fisheries management. This latter has tended to focus on management of single species (for the financial sector, read individual banks, say), but the current trend is to regard such analysis as incomplete, and that "the wider ecosystem and environmental context (by analogy, the full banking and market system) are required for informed decision-making".
If this sounds fishy to you, it's worth looking at related findings in a paper just published by the Bank's Executive Director of Financial Stability, Andrew Haldane. This notes that, "however sensible structuring of credit may have seemed for individual firms, it is difficult to conceive of a network which could have been less structurally robust. Darwinian evolution is currently in the process of naturally deselecting CDOs. But there is a strong public policy case for the authorities intervening more aggressively when next financial innovation spawns species with undesirable physiological features."
Another striking analogy with the natural world is used in an Ftfm article this week, to demonstrate that "what may be good from an individual investor's point of view is not necessarily in the interests of the investment community as a whole".
What next in the apparently ever more closely linked worlds of finance and nature? Hedgehog fund managers? Primate equity?
Maybe we should just be grateful for a bull market…
The Bank of England is, it seems, hoping to learn something from the animal kingdom and other non-financial structures about how better to run the financial sector.
Gillian Tett, in the FT this weekend, reports that Mervyn King and his colleagues have been brainstorming with Lord Robert May, eminent zoologist and former head of the Royal Society, about whether the actions of the financial services industry can be predicted or controlled in the light of what we know about animal behaviour or environmental systems.
A paper co-authored by Lord May last year suggested that risk management in the financial sector is analogous to fisheries management. This latter has tended to focus on management of single species (for the financial sector, read individual banks, say), but the current trend is to regard such analysis as incomplete, and that "the wider ecosystem and environmental context (by analogy, the full banking and market system) are required for informed decision-making".
If this sounds fishy to you, it's worth looking at related findings in a paper just published by the Bank's Executive Director of Financial Stability, Andrew Haldane. This notes that, "however sensible structuring of credit may have seemed for individual firms, it is difficult to conceive of a network which could have been less structurally robust. Darwinian evolution is currently in the process of naturally deselecting CDOs. But there is a strong public policy case for the authorities intervening more aggressively when next financial innovation spawns species with undesirable physiological features."
Another striking analogy with the natural world is used in an Ftfm article this week, to demonstrate that "what may be good from an individual investor's point of view is not necessarily in the interests of the investment community as a whole".
What next in the apparently ever more closely linked worlds of finance and nature? Hedgehog fund managers? Primate equity?
Maybe we should just be grateful for a bull market…
Death and Taxes
29 April 2009
The proposal to impose a tax rate of up to 30% on pension contributions for higher earners seems unlikely to prompt a resurgence in Government popularity. Indeed, the Government's own online pensions page makes no mention of the proposal.
To be fair, HMG has said it will consult on the idea, so the plans are not necessarily set in stone. But reaction so far has been colder than a witch's nipple. Apart from the impact on the pockets of the wealthy pension saver, (such as your average national newspaper editor), the pension industry is up in arms about the flagrant contradiction of a longstanding tenet of UK pension design – namely that, unlike many regimes elsewhere in Europe, UK pension contributions are tax exempt, as are investment returns, but pensions in payment are subject to income tax. Any change is bound to be seen with, at best, concern and, at worst, horror, by the UK pensions industry.
So, partly in a no doubt vain attempt to add an element of balance to the debate, but mainly just to be contrary, can I recommend this interesting, if rather technical, OECD paper from 2001? It suggests that the pre-paid tax model has a number of features to recommend it – notably that it brings forward the taxation income deferred under the present system, reduces the scope for tax evasion by collecting the money up front, and raises more revenue from those who are higher rate tax payers in their working lives but revert to basic rate tax in retirement.
Politically, there is a fascinating parallel with the political debate in 1997, when the soon-to-be-ousted Conservative administration proposed something similar through its Basic Pensions Plus idea, to the scorn of the then opposition.
The proposal to impose a tax rate of up to 30% on pension contributions for higher earners seems unlikely to prompt a resurgence in Government popularity. Indeed, the Government's own online pensions page makes no mention of the proposal.
To be fair, HMG has said it will consult on the idea, so the plans are not necessarily set in stone. But reaction so far has been colder than a witch's nipple. Apart from the impact on the pockets of the wealthy pension saver, (such as your average national newspaper editor), the pension industry is up in arms about the flagrant contradiction of a longstanding tenet of UK pension design – namely that, unlike many regimes elsewhere in Europe, UK pension contributions are tax exempt, as are investment returns, but pensions in payment are subject to income tax. Any change is bound to be seen with, at best, concern and, at worst, horror, by the UK pensions industry.
So, partly in a no doubt vain attempt to add an element of balance to the debate, but mainly just to be contrary, can I recommend this interesting, if rather technical, OECD paper from 2001? It suggests that the pre-paid tax model has a number of features to recommend it – notably that it brings forward the taxation income deferred under the present system, reduces the scope for tax evasion by collecting the money up front, and raises more revenue from those who are higher rate tax payers in their working lives but revert to basic rate tax in retirement.
Politically, there is a fascinating parallel with the political debate in 1997, when the soon-to-be-ousted Conservative administration proposed something similar through its Basic Pensions Plus idea, to the scorn of the then opposition.
Non-Execs please, We're British
27 April 2009
A feature of this recession has been the ongoing debate over who's to blame. In this context, a variety of culprits have been cited. The regulator blames institutional investors. Sections of the media blame the regulator. The Daily Mail blames Gordon Brown. Some, it seems, are even blaming the PR industry.
In view of all this, it's interesting to note the results of a Newsweek poll which reveals 85% of respondents place some blame at the door of the banks, while 73% allocate some blame to the Fed. Perhaps the most interesting thing about this poll, however, is the date – January 1991.
One group who seem to have emerged relatively unscathed from the blame game so far are non-executive directors. It's only seven years since former Tory Trade and Industry Secretary, Lord Young of Graffham, raised eyebrows by calling for the scrapping of non-executive directors. As a parting shot from his then role as president of the Institute of Directors, Lord Young argued that unless directors could get to know a business as well as executive directors, "why bother?"
Derek Higgs, who was subsequently charged with producing a report on the role and effectiveness of non-executive directors, offered a rather more positive vision, and proposed a more important role for them in ensuring the interests of investors were properly represented at board level.
Perhaps it's telling, then, that six years on from the Higgs review, this week's FTfm features a piece from ICSA policy director David Wilson, which identifies the banking crisis with "a colossal failure of corporate governance", and, in an echo of Sir Derek's original report, calls for greater courage and understanding from non-execs.
A feature of this recession has been the ongoing debate over who's to blame. In this context, a variety of culprits have been cited. The regulator blames institutional investors. Sections of the media blame the regulator. The Daily Mail blames Gordon Brown. Some, it seems, are even blaming the PR industry.
In view of all this, it's interesting to note the results of a Newsweek poll which reveals 85% of respondents place some blame at the door of the banks, while 73% allocate some blame to the Fed. Perhaps the most interesting thing about this poll, however, is the date – January 1991.
One group who seem to have emerged relatively unscathed from the blame game so far are non-executive directors. It's only seven years since former Tory Trade and Industry Secretary, Lord Young of Graffham, raised eyebrows by calling for the scrapping of non-executive directors. As a parting shot from his then role as president of the Institute of Directors, Lord Young argued that unless directors could get to know a business as well as executive directors, "why bother?"
Derek Higgs, who was subsequently charged with producing a report on the role and effectiveness of non-executive directors, offered a rather more positive vision, and proposed a more important role for them in ensuring the interests of investors were properly represented at board level.
Perhaps it's telling, then, that six years on from the Higgs review, this week's FTfm features a piece from ICSA policy director David Wilson, which identifies the banking crisis with "a colossal failure of corporate governance", and, in an echo of Sir Derek's original report, calls for greater courage and understanding from non-execs.
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